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The return of ABN AMRO: after missing the boom in nonconforming lending, ABN AMRO Mortgage Group is on its way back.

When Thomas Goldstein became chairman and chief executive officer of Chicago-based ABN AMRO Mortgage Group Inc. (AAMG) in February 2005, the company was seriously limping. [??] The former high-flying mortgage banking firm stumbled badly in 2003, and two years later was a shadow of its former self. The parent bank holding company, LaSalle Bank Corporation, also based in Chicago and a subsidiary of Netherlands-based financial giant ABN AMRO Bank N.V., could have sold off the mortgage unit. But when Goldstein looked around his domain, he still saw fire in the eyes of his employees and, more important, marketplace strengths that could be building blocks for the future. [??] Goldstein decided he was going to bring AAMG back to center stage. When the company was peaking in terms of origination back in 2002, it owned approximately 5 percent of the national market. That's now Goldstein's goal. "We can get back there," he says with firm commitment. "We are determined to get back there." Of course, some people might say Goldstein's a bit too ambitious, maybe even crazy, because the mortgage business has made a cyclical turn south. "When we started this, people said you cannot turn around a business in a declining market, but we are defying the skeptics," he says.

One of the key points in Goldstein's playbook of turnarounds is an improvement in profitability--a tough objective in a competitive, declining market, yet it is one of the first goals AAMG seems to have attained. "Profitability is much stronger this year than it was a year ago," he says. "It has steadily improved every quarter, and has continued to improve in this down market."

Loyal customers

Two intangibles that have worked for AAMG are loyal customers and creditworthy loans. Suzanne D'Angelo has worked with AAMG for about 12 years, the past seven after she formed her own mortgage brokerage firm, Family Mortgage Network Inc., Rocky Point, New York.

"As soon as I opened my own firm, ABN AMRO was the first bank I wanted to get with," says D'Angelo. "[It is] an incredible bank, very innovative." Today, Family Mortgage does 25 percent of its origination business with AAMG, she reports. "If I ever had to work for a bank, this would be the one," says D'Angelo.

The other thing that has worked for AAMG in these leaner times is that it traditionally sold its product into the more stable end of the credit spectrum.

"If you look at where we are positioned," notes William Newman, AAMG's executive vice president of business development and president of InterFirst Wholesale Mortgage Lending, Ann Arbor, Michigan, a unit of AAMG. "We have been in the prime credit space, and we haven't layered on some of the risks--in particular, segments where repurchase risk has become more prevalent, which the market has yet to fully account for."

Newman proved an accurate pundit. By the summer of 2006, repurchase problems in the industry began to surface.

Kansas City, Missouri-based H & R Block Inc. reported a big hit on its balance sheet for the fiscal quarter ending Aug. 31, 2006, because of increases in mortgage loan repurchases at its Irvine, California-based Option One Mortgage Corporation subsidiary. According to the company, the first-quarter numbers included a provision for losses of $102.1 million, reflecting the estimated recourse liability recorded by Option One for loan repurchases and premium-recapture reserves.

"We've modified our operating procedures and loan products to improve loan performance and profitability," noted Mark Ernst, H & R Block's chairman and chief executive officer, in a prepared statement. "We have tightened underwriting criteria and pricing guidelines while continuing to reduce origination costs."

In one sense, AAMG and the rest of the mortgage industry have been going in different directions for the past four years. While the industry continued to post record origination numbers until this year, AAMG floundered. Now the industry has entered tough times, but AAMG has gotten itself righted.

"We hit the hard times before the industry did," says Charles Van Swearingen, AAMG's executive vice president and chief financial officer. "We are on the upswing, and others are seeing the tough times."

When things go wrong

AAMG was formed in 1999 from two major consolidations: the 1993 buyout of Ann Arbor, Michigan-based InterFirst Bancorp by Detroit-based Standard Federal Bank, and then the 1997 acquisition of Standard Federal Bancorporation Inc. by ABN AMRO.

"At the time of the Standard Federal acquisition, the mortgage operation was tiny," says Goldstein. "Then, under the leadership of William Newman and Stan Rhodes [vice chairman and former president], we went on to become a formidable national competitor."

In the late 1990s there was a significant refinance boom, and that gave AAMG the opportunity to substantially grow the business, says Newman. "We hired more salespeople and got more breadth geographically."

By 2002, AAMG became the nation's fifth-largest home mortgage lender, with an in-house, record-breaking $119 billion in mortgage production--a 44 percent increase over the year before, the company reported. Things looked almost as good the following year.

While the company broke its previous year's production record with a reported $131 billion in originations for 2003, it was interesting to note from the corporate release that the pace of year-to-year production growth slipped to 10 percent and the lender's ranking fell one slot to sixth place.

It was in 2003 that things started to go badly. That year, AAMG discovered, investigated and self-reported to the Department of Housing and Urban Development (HUD) past actions of its employees that involved Federal Housing Administration (FHA) insurance certifications that were not completed properly. The matter involved approximately 28,000 FHA-insured loans.

"We grew so quickly. We were doing innovative things, interest rates were low and we sat in the sweet spot where the market was screaming for refis--but we didn't have sufficient controls in place to handle the volume," notes Van Swearingen.

Newman adds, "The business grew a bit too fast for the operations and control we had in place."

In January 2006, AAMG finally got that monkey off its back. In a settlement with the U.S. government, it agreed to pay $16.85 million in compensation for paperwork irregularities, while also agreeing not to pursue approximately $24 million worth of insurance claims for defaulted loans from authorities.

Stuck in conforming loans

A lack of adequate controls was not the only problem AAMG faced. The company's specialty was the conforming loan, which was a good place to be during the early phase of the refi boom. Around 2004, however, interest rates began moving up along with home prices and other lenders switched to a variety of other nonconforming loan products. AAMG didn't, and its business got crushed.


Equity Services Inc., Raleigh, North Carolina, has been a most loyal customer of AAMG, having worked with the firm since its earlier iteration as InterFirst. In 2006, Equity Services will do about $700 million in originations, reports Jeffrey Burgess, the company's president and chief executive officer. "ABN AMRO will get about 10 percent of that business," he says.

But even Burgess suggests, "They have been a little slow to the game in alt-A offerings." ABN AMRO's portal is excellent, but if it has to do something outside the portal, it won't bring the new product online, Burgess adds. "This has hurt them, in that they have not been able to move as quickly as others into the alt-A [product space]."

Why is this a problem? It has hurt production volume because mortgage bankers such as Equity Services are doing more alternative-type mortgages. For example, Equity Services used to do 90 percent to 10 percent traditional mortgages versus alternative-A, says Burgess, but "now we are 70 percent traditional and 30 percent alt-A," he says. "It has become a growing product in this economic environment."

ABN AMRO had a very centralized process that could handle the conforming loan, explains Randy Conte, AAMG's executive vice president and chief operations officer. "As interest rates went down, people wanted fixed-rate loans, and we are very good at that. We hummed along for a few years. Then interest rates began going up, and the market slowed. Our competition moved to products other than the 30-year, fixed-rate, and we were slower to change."

Newman adds, "We were well-positioned in the sweet spot of the refinance business with conventional, conforming loans. As interest rates started to increase, other products were preferred by the marketplace. We were just not well-positioned at that time to take the risks associated with the broader products."

After hitting a record for mortgage originations in 2003 of $131 billion, production plunged in 2004 to $57 billion, the company reported. In 2003, 721,000 loans were funded. By 2004, those totals dropped to 370,000.

When things go bad, they really go bad. AAMG even ended up with mud on its face when it wasn't at fault. In November 2005, AAMG announced that a computer tape containing data on approximately 2 million residential mortgage customers was lost while being transported by express deliverer DHL International.

A month later the tape was found, but the story captured the attention of the financial world, and Goldstein had to quickly announce changes: AAMG would encrypt data and send it over secured networks when possible, or use special couriers to avoid another tape loss.

Back on track

Goldstein managed to get the company stabilized in 2005--barely. Originations dropped another 6 percent to $53 billion from 2004 to 2005, according to US Banker magazine. Goldstein expects the production numbers to be even lower in 2006 as the total market continues to slow.

"When I came in, I first wanted to see if the company was alive," says Goldstein. After seeing that spark of life, he immediately decided to get "the business right-sized."

He says, "If you look at market share quarter-by-quarter in 2005, we increased because we did some fairly aggressive things with pricing. For example, we increased the price we paid brokers for certain products to be among the most competitive in the market. These quarterly gains also told us our business was alive. By the fourth quarter 2005 and first and second quarters this year, we have held steady."

If one looks "behind the numbers," Goldstein adds, there are some positive things going on. "We have always been a conforming shop, and our share has been stable even as the market for conforming loans has declined during the past few years. Also, our nonconforming production has gone up and is accelerating as we get our house in order."

At the end of 2005, US Banker put AAMG's market share at 1.61 percent--so a lot still has to happen if Goldstein wants to meet his goal of 5 percent.

"There is no secret that we had issues with regulators in 2003; there is no secret that our market share declined," Goldstein notes. In view of all that, Goldstein's turnaround goals included three things: profitability and market share growth; improving compliance and control; and increasing employee engagement.

Profitability is up, and market share, while not yet moving sharply up, has at least plateaued. As to the other issues, Goldstein reports, "We aggressively monitor our compliance figures and continue to see improvement. We are exceeding our internal benchmarks, but want to improve further."

As to employee engagement, the company surveys employees annually, and, says Goldstein, "The increases we have seen this year are among the best numbers the company has ever seen. Knock on wood--I believe the employees see where the company is headed, and they are excited about its direction."

The company has been stabilized, Newman adds. "If we look at performance metrics, there has been substantial improvement across the board, except market share," he says. "However, if you look at where we are strongest--the conventional loan segment--our market share has remained stable. At this stage, we believe we have turned the company around, and we are starting to grow again in a more sustainable way than we did in the past."

Long-lasting relationships with brokers

On a general level, the company originates mortgage loans through its own various divisions as well as affiliate companies. Simple enough, but even that needed changing. Two of Goldstein's first initiatives as CEO were to restructure the company, which he did by dividing it into three parts: operations, processing and servicing new loans; financial markets, pricing, hedging and secondary market sales; and sales and marketing.

Secondly, he had the company devise a new strategic plan, which was completed at the end of July 2005. Goldstein tells this anecdote: "One of the general managers for sales was asked to be on the strategic plan team. She spent her whole life selling and had never been involved in anything as lofty as strategic planning. She told me the whole time she spent working on the plan she was waiting for the 'shazam'--the thing that we were going to do that was dramatically different. Then she realized there was no shazam: It was all about figuring out what we were good at and doubling down so we could be the best for brokers and correspondents to do business with."

AAMG has more than 5,000 brokers and correspondent customers. And it has a team of account executives around the country to support the origination efforts.

"We are not focused so much on the production per day of the salesperson, but on developing the salesperson to be better," says Newman. "When you look at the competitive landscape, we believe most of our competitors make it the brokers' responsibility to drive the business end. We help the brokers by providing them with tools so as to market directly to consumers. We are much more interested in developing a broader and long-lasting relationship with our brokers and correspondents."

Early technology investments

While not a technology powerhouse, AAMG has introduced a number of products or tools to make life easier for brokers, correspondents and, ultimately, the consumer.

Probably AAMG's most popular technology innovation is its Mortgages Online At InterFirst (MOAI[R]) portal, where brokers can submit loans electronically for underwriting, receive no-cost automated underwriting feedback and credit reports, and register loans electronically. In particular, MOAI allows brokers to submit rate locks online with immediate confirmation; fund loans over the Internet with instant confirmation; order and receive closing documents; and directly access essential information.

"MOAI was leading-edge technology, as it brought front-end application to our broker work force," says Conte. "It allowed brokers to interface with us via the Web, upload a loan or for us to see what is going on. What we are trying to do now is develop the next iteration of MOAI."

AAMG was the first to come out with a technology solution, or portal, and it was the best in class, says Equity Services' Burgess. "Other companies such as Countrywide [Financial Corporation, Calabasas, California] and Chase [Edison, New Jersey] have developed portals, but AAMG was so far ahead of the game, it enjoyed a superior position for about 10 years--that's a long time in an ever-changing world."

It was not only good technology, adds Burgess, but AAMG backed it up with people who understood the technology, so "it was easy for customers to use."

Family Mortgage's D'Angelo agrees. "Their technology is up to snuff, and still a little further in advance than anyone else. They had online approvals before the rest of the industry. Even today, it's still easier to use than at other banks. Other banks do online approvals, but they require a lot more effort."

One of the key moves AAMG made in regard to technology was to acquire, back in 2001, the URL (uniform resource locator) for However, even AAMG executives say the company has yet to fully exploit the acquisition. "We bought it when refinancing started to kick in, and so for several years we were well-positioned because it added a tremendous amount of retention capability and production to the business," says Newman.

" is a great asset," Newman adds, "but we have not promoted it outside the 1.6 million consumers [whom] we service loans for."

Newman admits the company has not leveraged the name until recently, when it began marketing the site through more advanced search and online promotions. "We have a small group that is dedicated to figuring out innovative ways to look at the URL not only to benefit the customers that we serve today, but new customer acquisition through the online space," he says.


In 2006, with the mortgage origination market slowing, a number of mid-tier mortgage companies began looking for buyers. The consensus is that during the next few years only companies committed to the mortgage business for the long term will remain in the game.

And not only has AAMG committed to staying in the origination game, but it is committed to staying in servicing as well.

"One of our strengths is that we have a balanced business model," says Van Swearingen. "We have a large servicing portfolio and a broad origination network. Not all companies are balanced like that. During the refi boom, the origination side of the business was profitable, but when originations decline, you can rely on profits from your servicing portfolio."

Although AAMG has sold off the servicing on some loans over the past few years, it mostly has been acquiring and adding loans to its servicing portfolio. "Over the past year, we bought 10 servicing portfolios of loans totaling approximately $27 billion," notes Maria Fregosi, executive vice president of AAMG's mortgage capital markets unit and a member of the firm's executive committee.

"We have been rational in our pricing," she adds. "We have not gone out and tried to buy market share. We run a number of pricing tests. We know where we can try to capture volume quickly through price, but not necessarily at the expense of the bottom line."

In regard to the capital markets, the big initiative for AAMG for the year ahead is risk-based pricing, says Fregosi. "That is, closely aligning the price investors are willing to pay for mortgage assets and their characteristics, and bringing that value to the mortgage customer."

This requires strong alignment between the mortgage secondary market and the primary market, Fregosi explains. "We believe our vertically integrated model will allow this."

As for the competitive marketplace and market pricing for loans? "When I look at the competition, I can't determine how they are pricing at the levels they are," she says. "They may have different objectives than me. This year, AAMG is very focused on hitting our return on equity targets."

Tom Goldstein would be happy to hear that.

"We have been successful in turning in materially better profitability numbers, and in this environment we see everyone else going the other way," Goldstein says. "The market will get worse before it gets better, but at some point the market will get better--and AAMG will be there."

Steve Bergsman is a freelance writer based in Mesa, Arizona. He can be reached at
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Title Annotation:Cover Report: Wholesale/Correspondent Lending; ABN AMRO North America Inc.'s Tom Goldstein
Author:Bergsman, Steve
Publication:Mortgage Banking
Article Type:Company overview
Date:Nov 1, 2006
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