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Branching out.

Branching Out

LAST YEAR, Des Moines' Norwest Mortgage, Inc. doubled its 1989 residential production - bringing in $8.8 billion in loans. "It's pretty electrifying," says Stuart Feldstein, president of SMR Research Corporation, Budd Lake, New Jersey. "You don't see too many rates of growth like that among large players." Today, Norwest "has the fastest growth rate in mortgage origination volume among the top 25," Feldstein adds.

Norwest Mortgage is currently the fifth-largest originator in the country, according to SMR Research. Norwest Mortgage's 1990 retail originations totaled $4.2 billion, nearly half of its total fundings, according to SMR Research. Along with its retail production, the firm also has grown its wholesale division, and its servicing portfolio has increased to $4.5 billion. Mark Oman, president of Norwest Mortgage, says each is seen as a separate line of business. Total retail and wholesale originations are expected to run between $10 billion and $12 billion in 1991. What's surprising to many industry observers is the way in which Norwest has increased its volume.

It seems the retail side of Norwest - with more than 280 branch offices - is the business to watch. Retail production now accounts for more than twice the company's total volume from just two years ago. In 1988, Norwest funded $1.8 billion in residential loans, according to SMR data. Retail originations accounted for $1.3 billion of that total. This strong retail orientation comes at a time when many other residential originators have been retreating from retail and instead embracing the wholesale approach.

Being one of the nation's top home loan originators is not a new experience for Norwest. From 1983 to 1985, the firm was ranked even higher in terms of national production than it is today. But in 1987, unsalable, below-market mortgages contributed to a $46 million loss at Norwest Corporation, the bank holding company parent.

Lloyd Johnson, who had retired from Security Pacific Corporation as vice chairman, was asked that year to head up Norwest Corporation and try to fix some of its problems. Johnson set up strict lending guidelines in banks Norwest owned but also gave local offices more autonomy to make decisions and be more responsible for their own bottom line. Norwest Mortgage has used this same strategy to make each mortgage branch accountable as a profit center, says Oman.

Management skills

Local managers make decisions, and then are rewarded for their results. "Compensation is based on profit" Oman explains. To help managers, Norwest provides a "template for profit" that imposes guidelines, but, at the same time, makes managers accountable for their own decisions, he adds. The home office leaves implementation of the strategy to branch managers - although Oman says, "We don't let them all do their own thing."

Senior Vice President Peter Wissinger explains how managers are involved in the company's business at the branch level. "We leave the business decisions to branch managers," he says. For example, branch managers get to make local pricing decisions. "They get all the income [from the loans they originated] and must balance gross income against their expenses to create a profit."

In the past, origination volume was considered a primary goal of most mortgage lenders, and the mid-set of many companies was not to go out of their way to pay a real premium for branch management, Oman notes. He believes, however, that this type of thinking is beginning to change and sees the ability of managers to understand different facets of business management as increasingly important. Confining the focus to simply overseeing originators and processors is not sufficient for managers wanting to succeed in today's market environment, he explains. Skillful manipulation of "product, price and staffing," Oman says, are what will bring profits.

Branch lenders at Norwest who already have core training in sales and operations often work with the company's regional managers to develop other business management skills that can boost profits. Regional managers usually oversee five to eight branch managers, says Executive Vice President Mike Keller. Every six weeks regional managers visit each of those offices for a few days.

Keller says that if mortgage lenders closely monitor and control costs and manage all aspects of the production process, retail production "should produce a higher profit per loan" than wholesale lending does. Keller trains local managers "to understand what their costs are and what their revenues are." Each office gets a branch profit and loss (P&L) statement, including allocations that support all headquarter expenses.

Norwest offices are not cut out of one mold. Keller notes that profitable offices can originate between $10 million and $100 million annually. However, it's important that each branch manager have expert business management skills and "really get comfortable with the P&L statement," he adds.

Controlling their own

Economies of scale exist at Norwest's home office, which houses centralized functions such as post-closing, says Keller. But branch offices create added value and affect company profits, because they can closely monitor production variables, such as how fast their pipelines are turning and the number of loans handled per employee. Learning how to control these variables should allow each office to be profitable without being reliant on volume. Such calculations "are not typically done in mortgage banking," claims Keller, adding that "it hasn't been an industry that's promoted management strength."

Wissinger explains that Norwest's managers strive to be "business planners." He notes that many in the business think that you can't plan mortgage originations because of their inherent volatility. But, Wissinger says, you can - by making sure that staffing and expenses are in line with volume. For instance, with volume up now, Norwest branches are "increasing staffing to maintain customer service," he says.

By closely scrutinizing their operations, managers focus on net income, rather than volume. Further, Wissinger notes, producing profits is "lucrative" for local managers in terms of their own compensation, because branch-manager pay at Norwest is partially based on profitability. When managers are offered volume incentives - as is traditionally the case - they tend to overstaff, thus reducing profits, says Wissinger.

But no one at the firm has forgotten that sales are the backbone of the business. Norwest Mortgage has "one of the stronger" commission schedules in the industry, Keller explains. "A good salesman is always profitable," he says, but a loan officer who is paid less causes production to drop.

Better salespeople are less dependent on aggressive pricing to create volume, Wissinger says. However, the company allows "local pricing," that is, dropping national rates in order to get deals done. Norwest loan officers, for example, can take 25 basis points off the quoted rate without asking their manager.

Branch managers have the authority to cut another 25 basis points off the price. Although originator commissions also drop when local pricing is used, it allows them to get business that they otherwise might lose, says Charles Vance, a Norwest branch manager in Rockville, Maryland.

However, prices aren't dropped indiscriminately. Sharron Whittington, a Las Vegas branch manager, negotiates rates only after seeing a deal. For instance, if half a dozen co-borrowers are involved, there's little reason to offer an attractive rate, she notes. However, with good customers and loans that show evidence of few problems, according to Whittington, they may drop the rate.

Vance has continued originating while working as a branch manager. He oversees eight loan officers, five processors, two settlement officers and a receptionist. Vance's personal production has fallen from more than $20 million annually to around $15 million since becoming a manager. However, Norwest's override on office profitability makes the situation attractive for him as a branch manager.

Making retail work

At a time when wholesaling is becoming more important to firms looking for ways to reduce fixed costs, Norwest Mortgage has close to 285 retail offices in 42 states. Its executives "feel they can do business well the old-fashioned way," Feldstein notes.

Although Norwest executives say profits are more important than growht, some observers believe the company's origination growth rate is partially driven by aggressive pricing - which, in turn, reduces net income.

"There are smaller companies making larger profits," notes SMR's Feldstein. But he adds that increasing market share is a smart strategy in today's shrinking marketplace. Less competition provides an "opportunity to come in and fill the void."

Norwest Mortgage President Oman was trained in a finance company and also worked in public accounting. He joined Dial Finance in 1979, which was acquired and changed into Norwest Finance three years later. Dial's primary products were unsecured personal loans and second mortgages.

As Norwest Corporation encountered problems in the mid-1980s, several former Dial Finance employees gained more influence. Perhaps one reason for this is that after being acquired, the finance company accounted for much of Norwest Corporation's growth. Dial's former chairman became a vice chairman at Norwest during this time, and he took an interest in the mortgage company's situation.

After suffering sizable marketing losses in 1984, Norwest Mortgage quickly downsized. Residential Funding Corporation, a private conduit for packaging and issuing mortgage securities owned by Norwest, was old to Salomon Brothers. In addition, the relocation department was put on the market. And Norwest's servicing operation was sold to GMAC Mortgage in 1985, because the production volume was not there to keep that business running profitably.

Oman became Norwest Mortgage's CFO early in 1985, and four years later became president - after holding positions in the secondary marketing and retail divisions. A background at the 650-office Norwest Financial had taught Oman the importance of having "management disciplines" in place.

During 1985 and 1986, Norwest Mortgage was "introspective," Oman recalls, and management spent much of the period building the company's "template for profit" in retail branches. In addition to setting up the profit model, reliable management information systems also were put in place.

Shortly afterwards, Norwest began expanding. At that time, "retail was not in vogue," Oman recalls. Due to cut-throat pricing by thrifts attempting to grow their way out of earnings problems, it was hard to profitably keep retail branches open. Norwest saw the S&Ls as "short-term players," says Oman, and predicted that the thrifts' desire to compete on the basis of irrational pricing soon would take them out of the business.

Norwest's substantial investment in branch offices subsequently began when the company acquired branches by simply assuming the lease, loan pipeline and employees of lenders leaving the business. One firm even paid Norwest to take over its operation. In addition, Norwest also opened new offices from scratch.

Before opening a branch, Norwest looks at the local economy, the competition and how its products and prices would fit into the picture. Wissinger says the firm has "learned how to open an operation" - that is, how to open branches without draining profits.

But, Wissinger adds, there is "no blueprint" for their branches. One market might have one office, while another is scheduled to get 10. Short-term leases and satellite sales offices will help the branches in the larger market stay flexible, while the one branch in a smaller town probably would have more permanent facilities.

Branch office growth has "accelerated during the last three years," says Wissinger. More than 90 of Norwest's branch offices were added in 1990, and the same percentage was opened the year before. With all this growth going on, he notes that "we've closed very few offices." Of the 40 branches Wissinger opened in 1990, "more than two-thirds were profitable" by December, according to Wissinger.

Oman was able to find top talent available in markets he wanted to enter. Norwest found it could compete by using a strategy that called for its branches to "|out-local' the nationals and |out-national' the locals," says Oman.

By giving managers authority and keeping underwriting at regional centers, for instance, Norwest can operate much like a local lender. Decisions are made quickly and close to the borrower, while overhead is kept low.

But Norwest can compete with regional lenders because of its national economics of scale, which provide low funding costs and efficient secondary market pricing. Oman says, "We like the control that [retail originations] gives us."

Role of servicing

Most of the servicing portfolio has come from Norwest Corporation banking acquisitions, Oman says. When the parent bank bought First Minnesota last year, a $1.9 billion servicing operation landed in Norwest Mortgage's lap, bringing the company's total servicing business to $4.4 billion at the end of 1990. Oman says another $800 million is expected this year, reflecting Norwest's merger in April with United Banks of Colorado, the largest institution in that state.

Servicing is primarily retained in the 12 states where both Norwest Mortgage and Norwest Corporation branches are present, adds Oman. Other bank services then can be cross-sold to these mortgage customers. But most of Norwest's servicing is sold to BarclaysAmerican/ Mortgage Corporation in Charlotte, North Carolina, a relationship that began in late 1989. BarclaysAmerican COO Tim Schuck commented that the business from Norwest is on a "larger scale" than other servicing purchase agreements they have with other originators. Oman refers to BarclaysAmerican as a "long-term partner." Keller adds that servicing sales are seen as a way to boost profits and meet shareholder expectations.

Norwest originations have shown low delinquency rates, according to SMR Research Many of Norwest's originations are backed up midwestern homes, which weren't hit by the real estate price drops that have affected both East and West Coast properties.

Strategic management - more

growth ahead?

Norwest has done very well in a somewhat flat mortgage market; but what if loan demand were to substantially drop? One of the reasons many mortgage lenders have reduced their retail presence is because of the problem of carrying office overhead during both good volume times and bad. Oman says Norwest uses short-term branch office leases as one means to be able to either expand or contract its presence quickly. Having lease buyout options and renting less-expensive space also keeps costs controllable.

Staffing models further help the company keep its expenses in line with income. "The problem isn't bricks and mortar," explains Keller, noting that three-quarters of all Norwest's costs are for personnel. Keller says, "the said fact of this business" is that changes in volume demand changes in personnel levels.

Norwest wants to close three or four loans per employee each month. During times of high demand, Keller says, up to half a dozen loans per employee can be processed every 30 days. But if volume falls, "sooner or later, you have to lay off people," he adds.

Branch manager Whittington has learned creative ways of avoiding lay-offs. For instance, she once talked with her staff about the need for letting someone go, and they decided to work 32 hours a week instead of 40, rather than forcing someone to leave.

While it may seem like an unusual notion, Norwest executives see many opportunities for growth in the same markets where they currently do business. Wissinger claims, "We could double in size without entering many new markets." Even now, he says Norwest claims to have "two to three times the number of branches" its competition has in some cities.

Some of the company's top-producing loan officers come from these highly competitive environments, Wissinger adds. He says the firm can group offices together without seeing production drops.

Wissinger explains that Norwest's premier loan officers usually call on no more than five real estate offices and 20 agents. Norwest originators concentrate on building relationships, rather than approaching a large number of prospects. If a loan officer "wants to do more business," Wissinger advises that "maybe that person should see fewer people."

Norwest doesn't pay for any advertising - loan officers wanting advertising support must take care of that expense themselves, according to Whittington. But it isn't a problem for most Norwest originators; some of whom don't even distribute rate sheets. "I don't think you get a deal by dropping flyers," Whittington explains. Instead, she prefers to "rely totally on the [strength of the] relationship" with the Realtor.

Loan applications are taken on a computer system that links all Norwest Mortgage offices, Oman says. In addition, he says the firm is working on the "next level" of technology applications. This may entail being able to take applications on computers, according to Wissinger. Currently, a mainframe computer connects all the branches online, and Wissinger says he can get "by-the-moment reports" on a variety of activities: applications taken, pricing, turnover, staffing, volume, percentage of pipeline funded per month, how many applications pass underwriting the first time, closing efficiencies and profitability.

Wissinger says he devotes a lot of thought to "keeping an eye on the future," while managing the present. Norwest wants to "be positioned to respond to change" - whether it happens in the economy, in the regulatory environment or in the secondary markets.

When making decisions with long-term implications, Oman says he tries to "risk-weight the alternatives" and "not put all out eggs in one basket." For that reason, he says, Norwest at times sells servicing and other times retains it. And the firm also relies fairly evenly on both retail and wholesale originations.

A healthy parent

Management recruitment is a concern for Norwest. Because of its rapid growth rate, not enough talent can be developed within the company. But the firm's reputation "as a rapidly growing, quality company, with a strong parent behind us" makes the task easier, according to Oman.

"Today, |bank' is a four-letter word" in some circles, Oman adds. But not at

Norwest. Having a financially strong parent helps the mortgage company absorb one-time acquisition costs related with building a strong retail network. In addition, some Norwest Mortgage offices are in the parent company's banks.

More telling, however, is seeing the similar management philosophy shaping both the bank and its mortgage subsidiary. For instance, Norwest Corporation's COO Richard Kovacevich similarly claims that the bank tries "to out-national local banks and out-local national ones."

Based in Minneapolis, the $31 billion institution reported record profits in 1990. Earnings rose 37 percent, return on equity was 19.6 percent, and return on assets was a strong 1.06 percent.

Norwest Corporation also is growing through acquisitions. Its assets increased by almost $7 billion in 1990. Some analysts are concerned about the non-performing loans that the bank is acquiring as it buys other institutions. However, Duff & Phelps Inc., a rating agency, figures the non-performing loans will increase to 2.2 percent of assets after planned acquisitions are completed. Norwest's loss reserves then would equal 1.5 times the amount ofnon-performing loans.

According to SMR Research, Norwest Corporation's $5.9 billion portfolio of single-family loans has a delinquency rate of 0.48 percent. This compares to 1.36 percent. This bank holding companies.

Oman notes that many competing managers are working for weaker financial institutions than Norwest Corporation. When these people are looking to change jobs, they tend to be interested in Norwest.

Keeping skillful loan officers, watching branch costs and pursuing conservative secondary marketing practices are allowing Norwest to successfully originate mortgages through an extensive retail network.

In a mortgage market filled with new ways of doing business - including computerized originations, telemarketing and group affiliations - Norwest has prospered by refining traditional mortgage banking.

Howard Schneider is a freelance writer based in Ojai, California, specializing in real estate issues.
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Title Annotation:Norwest Mortgage Inc. expands retail branch operations
Author:Schneider, Howard
Publication:Mortgage Banking
Date:Jun 1, 1991
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