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WaMu's back: with energized new management in top posts throughout the company, Washington Mutual has got its momentum back.

IN 2006, WASHINGTON MUTUAL (WAMU) WILL MOVE ITS headquarters from its current location in Seattle's Washington Mutual Tower to a flashy new mixed-use building in the city's downtown. But the change in location is probably less significant than the changes that have already taken place inside the company. [??] Washington Mutual in October 2005 is a far different company than it was a year ago--especially in the Home Loans Group, where there are many new faces in the hallways. In the last year, the company made a number of significant senior management changes, primarily through hiring executives away from some of its largest competitors. [??] Following dismal second-quarter earnings in 2004, in large part due to losses in the Home Loans Group, Chairman and Chief Executive Officer Kerry Killinger promised "a complete overhaul" of Washington Mutual's mortgage unit. [??] A year later, it appears Killinger has kept his promise. [??] In July, Washington Mutual reported its first year-over-year profit gain in five quarters. The company reported an $844 million profit--up 73 percent from July 2004--exceeding Wall Street's expectation. The increased earnings were due in part to improvements in the Home Loans Group, which produced net income of $209 million in the second quarter of 2005, compared with a loss of $59 million in the same quarter last year.

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In Washington Mutual's second-quarter 2005 earnings conference call in July, Killinger spoke of the challenges the company faced integrating numerous acquired mortgage companies into Washington Mutual's operations. A year prior, Killinger had assured investors the company would address those challenges by "hiring top mortgage talent, attacking our cost structure and reducing the volatility in our MSR [mortgage servicing rights] hedging."

Killinger told investors in July of this year, "In short, we said we would fix our mortgage business and 12 months later, we have done exactly that."

New faces

In late 2004, Killinger tapped a leading mortgage industry veteran, Steve Rotella, as the company's new president and chief operating officer. Rotella came to Washington Mutual from JP Morgan Chase, where he was the chief executive officer for Chase Home Finance and executive vice president of JP Morgan Chase. At Chase, Rotella led all residential lending and directly managed the prime, subprime and home-equity businesses.

In late February, Rotella took on an additional role as the acting head of WaMu's Home Loans Group. He served as the acting head until late this summer, when the company lured another industry veteran to run its mortgage business. David Schneider, previously president and chief operating officer of CitiMortgage Inc., St. Louis, came on board in August as president of the Home Loans Group.

In addition to Rotella, a number of other JP Morgan Chase executives came over to Washington Mutual in late 2004 and earlier this year. They include: Taj Bindra, executive vice president of mortgage servicing; John Berens, senior vice president (SVP), servicing; Youyi Chen, senior vice president of the newly created Mortgage Portfolio Management and Research Group; and Bill Murray, senior vice president and division finance officer, mortgage servicing.

And in July of this year, Steve Fortunato left JP Morgan Chase to become chief financial officer (CFO) at Washington Mutual for the Home Loans Group.

Most recently, two more CitiMortgage veterans joined Washington Mutual in September: Cheryl Feltgen, chief credit officer for home loans; and Steve Stein, senior vice president of retail mortgage lending.

Hiring CitiMortgage's Schneider, along with Rotella and other seasoned Chase executives, was a smart move, analysts interviewed for this article say. "By bringing in Rotella, and his bringing in more [Chase] people, Washington Mutual started to do the most important thing, which was to diffuse management decision-making among a wider group of people," says Richard Bove, an analyst with the St. Petersburg, Florida, office of New York-based Punk Ziegel & Co.

Rotella "clearly has the capability to run a large organization with multiple products." Bove says. "He brings a skill set that I would argue that nobody had before at Washington Mutual. Rotella was operating a business within Chase. He knows how to run a large organization with all the issues that come up in technology, marketing, managing people and so on. Therefore he was exactly what they needed."

Frederick Cannon, an analyst with San Francisco-based Keefe, Bruyette & Woods Inc. (KBW), agrees. "Overall, the management changes have been very positive," Cannon tells Mortgage Banking.

"One of the challenges Washington Mutual faced is that 10 years ago it was a fairly modest-sized Northwest thrift. Today it's one of the top-three depository institutions in the country. Especially on the mortgage side, there's been almost a wholesale change in the senior management," Cannon says.

The recent hiring activity "reconfirms the trend of Washington Mutual to go outside the firm, and to larger corporations, for senior managers," Cannon wrote in a recent KBW research report.

Rotella himself is very optimistic about Washington Mutual and its mortgage unit going forward. "The company is very committed to the [mortgage] division. We are a more-than-competitive and growing home-loans business. I firmly believe that we're getting stronger every day," Rotella says.

Even through the rough periods. Washington Mutual has retained its No. 3 spot in both mortgage originations and mortgage servicing, Rotella points out. As of June 30, the company's servicing portfolio stood at roughly $739 billion, according to National Mortgage News. Washington Mutual originated $63.5 billion in loans in the second quarter of 2005, up from $54.1 billion in the first quarter, according to National Mortgage News' rankings of top originators.

And the pending acquisition of San Francisco-based Providian Financial Corporation will further diversify Washington Mutual by adding credit-card assets to its balance sheet, Rotella notes. The purchase of Providian, a provider of credit cards to middle-market consumers, will also open up myriad opportunities for cross-selling, Rotella says.

Hit a few speed bumps, but back on track

Since coming on board in January, Rotella has overseen a number of efforts designed to put the Home Loans Group back on the right track, he says. "Washington Mutual has had a terrific home loans business for a long time. It grew quite rapidly and hit a few speed bumps a couple of years ago," Rotella says.

Specifically, the company faced challenges in integrating the mortgage operations and servicing platforms of multiple companies following a rapid series of large acquisitions.

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In 2001, Washington Mutual acquired the mortgage operations of Vernon Hill, Illinois-based PNC Mortgage; Houston-based Bank United Corporation; and Columbia, South Carolina-based Fleet Mortgage Corporation. In 2002, Washington Mutual bought New York-based Dime Bancorp Inc., as well as Jacksonville, Florida-based HomeSide Lending Inc.

The rapid growth bolstered Washington Mutual from a regional Northwest thrift into one of the country's largest financial service organizations. But the mortgage unit started to show signs of trouble by late 2003, evidenced by its poor third-quarter results, says KBW's Cannon. In 2004, rising interest rates and a subsequent slowdown in refinances hit the mortgage unit hard. Inefficiencies in servicing and operations, as well as problems with the company's hedging strategy, became very apparent by the end of the second quarter of 2004, when the Home Loans Group reported losses of $59 million, according to Cannon.

Washington Mutual "made a series of acquisitions in a relatively short time," says Punk Ziegel's Bove. "It wasn't set up to absorb that many acquisitions in such a short time period. The net effect was they had too many overlapping systems. They didn't know what was happening on a customer-by-customer basis, they were losing payments, along with a host of other difficulties," he says. "All those acquisitions doubled and then tripled their size, but they didn't have the huge infrastructure to handle it."

Last summer Killinger declared the mortgage operations had "an unacceptably high cost structure," and vowed to turn the business around. In July 2004, the company announced the closing of about 100 retail lending and loan processing offices in 17 markets, resulting in the elimination of more than 2,500 positions in its mortgage operations.

By the end of third-quarter 2004, the mortgage unit had returned to profitability.

When Rotella took over the reins of the mortgage unit in January, improvements to the business were well under way, he says. "A lot of work was done last year, before I got here, to put the business on the right track," Rotella says. "What we've tried to do since then is to continue on that track and accelerate the momentum through a number of activities."

Those include adding experienced mortgage executives throughout the year, and most recently the hiring of Schnerder away from CitiMortgage, he says. Rotella also points to improvements in servicing efficiencies and risk-management procedures.

Over the past year, Washington Mutual worked hard to integrate multiple servicing platforms into one, Rotella says. Operating expenses in the Home Loans Group were reduced by close to $400 million in second-quarter 2005, compared with the second quarter of 2004, he adds. The company also closed retail mortgage banking offices in locations where it didn't have a retail banking presence, and worked to reduce volatility in its MSR hedging, Killinger said in the July second-quarter-earnings conference call.

Most important, Washington Mutual brought in Rotella, Schneider and other seasoned mortgage veterans to guide the revamped Home Loans Group, Killinger stressed in the conference call.

Improvements in servicing, risk management

At the peak of running multiple servicing operations, Washington Mutual had nine platforms, according to Rotella. "The servicing organization integrated the various servicing platforms into one over the course of the first half of 2004. There's been a tremendous amount of work around bringing our servicing organization together on one platform," he says. That integration was "a huge accomplishment. We've seen significant improvements in our service quality in that organization." WaMu currently uses Fidelity National Information Systems' (FNIS') servicing system (formerly known as ALLTEL before Fidelity purchased the company).

WaMu moved up several notches in Westlake Village, California-based J.D. Power and Associates' 2005 Primary Mortgage Servicer Study[SM], which ranks customer satisfaction index scores. The study, released in August, ranked Washington Mutual's customer satisfaction index score at 744, above the industry average of 730.

Rotella believes Washington Mutual is now one of the more efficient players on the servicing side of the business. The company reported loans serviced per FTE (full-time equivalent) improved 38 percent from the second quarter of 2004 to the same period in 2005, he notes. "That was a major accomplishment in organizing and coordinating the business," Rotella says.

Washington Mutual has also stepped up its risk-management efforts in the home loans business, Rotella says. "We've placed a huge emphasis on risk management in the business, both in terms of hiring industry-leading talent to manage market risk around our warehouse pipeline hedging and MSRs, as well as putting new processes and controls in place," he says.

Risk management is "an area where there were some issues in the past," Rotella concedes. "But we've had a number of very strong quarters in that area and feel like we're continuing to improve. Getting risk management to a place where we're as good as anybody else in the industry--if not better--is important," he says.

The efforts to improve risk-management procedures began prior to his arrival in January. Rotella points out. "Early on, an outside consulting firm [New York-based BlackRock Inc.] was brought in to advise the company. There was a change in hedge strategy that reduced the basis risk in the portfolio, which rippled through the instruments we're going to use," he says.

"But more important than the strategy changes, we've really augmented the talent, the modeling, the precision of information and the sensitivity analyses we look at. We now believe we are better able to understand and have better transparency around the behavior of the mortgage asset and how to adjust to changing market conditions," he says.

Changes are working

Bringing in experienced executives and making changes to the company's mortgage operations and servicing business appear to be working, analysts say. "From the trajectory of their reported quarterly earnings, they're certainly improving," says Cannon. "But I still think it's a work in progress. I don't think you completely change the operational efficiencies of one of the top three mortgage lenders in the country within a year," he adds.

In July, Keefe, Bruyette & Woods upgraded shares of Washington Mutual from market perform to outperform based on "our increasing conviction in earnings growth and improved profitability," according to a report co-authored by Cannon.

"I'm fairly positive on the [Washington Mutual] shares right now, because I think they've not only made progress, but there's still progress to be made," Cannon tells Mortgage Banking. "They lost a significant amount of market share during their operational difficulties, and now they have the ability to regain that," he says.

"The results we've seen over the last four quarters speak for themselves," Rotella says, citing four quarters of stable MSR results. However, he adds. "It is a difficult asset, and we believe we need to continue to improve in that area."

By adding new talent throughout the organization. Washington Mutual is "focusing the strategy of the business on the production side to make sure that the returns of the business are even better than they were in the past." Rotella says. Loans originated per operations FTE increased 28 percent from second-quarter 2004 to second-quarter 2005, "showing there's been a significant improvement in the efficiency of the business," he says.

Even through its most difficult times, Washington Mutual never fell far from the top of the rankings of the industry's major players. "This organization, through the good and the not so good times, has maintained its position as No. 3 in the industry," Rotella says. "Today we're building a great team and a great business. As this company gains strength and accelerates its momentum, watch out," he says.

Schneider brings diversity of experience

Rotella is particularly enthusiastic about the potential for cross-selling mortgage and banking products at Washington Mutual, and believes Schneider possesses the right combination of experience and ability to lead that effort. The company hired CitiMortgage's Schneider after an extensive search in the industry, Rotella says.

"We were looking for a special person to lead the Home Loans Group full-time who had a combination of real, deep experience in the business, who had knowledge of the industry and also had experience in banking from all angles," Rotella says.

"Beyond that, we were looking for somebody who would fit in with our culture. We're very people-focused in the way we treat each other and our employees with respect and fairness," he adds.

Schneider fit the bill, having run CitiMortgage, one of Washington Mutual's competitors, Rotella says. During his tenure at Citi-Mortage, Schneider was instrumental in the company's organic growth, and led the integration of two acquired mortgage companies, Rotella notes. Schneider also has solid experience in cross-selling home loans across a retail banking network and other distribution channels, he adds.

Prior to CitiMortgage, Schneider served as executive vice president of retail banking for Old Kent Financial Corporation, Grand Rapids, Michigan, and was responsible for the company's consumer deposits, consumer lending, business banking and leasing operations. Schneider is currently president of the Consumer Mortgage Coalition and is a member of the Housing Policy Council's executive committee.

"[Schneider's] experience in the business from all angles was something that was important to us," Rotella says. "While it was important to get somebody with mortgage experience, we wanted somebody who could contribute here across the broader company. [Schneider] had experience across a number of banking products and distribution platforms in previous lives before he was at CitiMortgage," he says.

Washington Mutual sees "a huge opportunity to weave the home loan business more tightly into our retail distribution franchise, our home-equity business and our subprime business," Rotella says. Schneider's experience with retail franchises and multiple banking products will be key to that effort, he says. Schneider "also has a proven track record of driving cross-sell activities through other distribution channels. That was really important to us," says Rotella.

"My past experience gives me a good understanding of what happens in other parts of the bank," Schneider says. "As I look at the road ahead here in the mortgage operation, I have a good understanding of how we can leverage our products, how we can do a better job in cross-selling and also what drives those different operations," he says.

"When I sit with the retail leaders here, we have a common language and a common understanding of what will make Washington Mutual successful."

Opportunities in home-equity, subprime and cross-selling

Schneider sees a number of opportunities to increase business in the Home Loans Group. "One is to take the home-equity product and drive it across our distribution networks in the Home Loans Group with our wholesale, our correspondent and, more specifically, our retail franchise," he says. Washington Mutual has "2,000 great [retail] branches out there with a franchise that's incredibly strong. We have an opportunity to do a much better job of leveraging that franchise to sell the first mortgage to the customer," Schneider says.

But execution will be key, he adds. "We have deep relationships with our brokers, we have deep relationships with our correspondent customers, and our retail sales force is absolutely superior. They're all clamoring for [mortgage products]. So it's just a matter of giving them the opportunity to sell the product," he says. "In some regards, we have the unique proposition of having the demand, and we just have to be there to fill the order. So we're working hard on getting that product out there, pricing it the right way and making it easy to fulfill the order."

Schneider is working with Mike Amato, president of retail banking distribution, to sort out exactly how to better leverage the retail franchise to sell mortgage products. "We're figuring out now: Do we put lending consultants in the branches? Do we leverage the great work that's being done in the branches where they're already taking applications?," Schneider says.

Rotella sees a "big upside" in Washington Mutual's ability to deliver mortgage products to customers through its 2,000-plus retail stores. "We've done a mixed job of that across the country," he says.

"Now we have [Schneider], who's come from one of the largest banking institutions in the country and one of the leading mortgage banking players, where [cross-selling in a retail network] was a key component of his job. I come from the third-largest banking institution in the country and ran the fourth-largest mortgage banking company in the U.S. at Chase, and that was a big part of my job," Rotella says.

Rotella also believes there's a good deal of potential for Washington Mutual to do more business in home equity and subprime lending. "That's an area this company really under-participated in: adding home-equity and subprime into its business," he says.

Washington Mutual owns Anaheim, California-based Long Beach Mortgage, one of the largest subprime lenders in the country, Rotella notes, "Long Beach is primarily a wholesaler operator. We think there's a significant opportunity to offer subprime mortgages to [retail] customers who have a blemish on their credit report and appropriately could obtain a subprime loan," he says. "For customers who come to us for a prime loan and can't be approved, if it's appropriate, we should offer them a subprime loan. We think there's a lot of business there both in first-mortgage and home-equity. It's also another product in the basket our loan officers can offer to the right customers," Rotella says.

Both Rotella and Schneider bring solid experience in cross-selling home-equity, subprime and alternative-A products. While Rotella was at Chase, the company did significant volume in selling home-equity through its retail mortgage channel at the point of sale, Rotella says. Washington Mutual "is really early on in that process, but already we're seeing increases in the amount of cross-sell volume, and it's growing every month," he adds. Rotella would not specify amounts. "Given the size of our franchise and the strength of our sales force, we think it's just a big opportunity," he says.

Washington Mutual will focus on alt-A mortgages in addition to subprime and home equity, Schneider says. "We have a fairly active plan around making that product available to our customer set, There's the demand out there. Our retail sales consultants want to be able to offer it to their customers, and we want to be able to offer it to our B2B [business-to-business] customers as well," he says.

Opening more stores

Washington Mutual will open about 200 new retail stores by the end of 2005, Rotella says. Though not quite as aggressive as the plan announced at the start of the year--earlier targets were set at 225 new stores--the growth strategy is still ambitious, Rotella says. "I believe we're the industry leader in opening new retail stores," he adds.

The company's Occasio[TM] store concept has been a big hit, according to Rotella. Latin for "favorable opportunity," the Occasio concept combines banking and friendly customer service. The Occasio stores are "very open and welcoming. A lot of them have play areas for kids," he says.

Where will new stores be located? "We're leaning toward those areas that have the highest population growth and the ability for us to get customers to come in for checking accounts and other banking," Rotella says. "That's going to tend to skew us a little bit toward the Sunbelt, California and New York, but we'll be putting stores in all of our current locations," he says. "We are pursuing a strategy of opening stores in the locations we're [already] in, because we believe there's tremendous opportunity there."

Schneider views the opening of new retail stores as "200 new points [of distribution] for the Home Loans Group as well. The markets that are attractive for growth in home-equity loans, checking accounts and other products are the very same markets where you have great real estate opportunities," he says.

Northwest culture

Coming from the East Coast, Rotella has found both the city of Seattle and the culture at Washington Mutual to be big attractions. "One of the real draws for me was the culture of [Washington Mutual]. It starts with CEO [Killinger], but there's a long heritage here of having an organization that truly believes in creating an environment where people can work hard and be driven to compete in the marketplace in a very intense way," Rotella says. "But we all work together in a way where people are respected, where egos are checked at the door and where we have a little fun. I've found the culture is a great combination of Northwest-West Coast," he says.

Washington Mutual has a firm commitment to both its employees and the community, Rotella adds. "We're not the kind of organization that believes you can get people to respond to a command-and-control environment and one where it's harsh in the way we treat people. We believe in being fair, open and respectful. It's a meritocracy where performance wins out, but it's done in a way where we can all feel good about each other, what we do at work and in the community when we go home at night. It's a special place," he says.

While many companies talk about their unique cultures, "I've never seen an organization that lives its culture the way this organization does," says Rotella. Washington Mutual polls its employees regularly on how they feel about working for the company, he says. "The scores show they view it as a special place [where] and a place they want to work. There's incredible power in that if you can tap into it--to have people work together and be collaborative, enjoy the organization but at the same time being incredibly driven about beating the competition. I think that has great long-run benefits."

Rotella has found Seattle to be a vibrant city. Working in the Northwest corner of the country has also given him a different perspective on the banking and real estate businesses. "I think it's very healthy to get a different orientation." The entire West Coast accounts for a sizable portion of the country's home-mortgage business, Rotella notes.

Option ARMs and interest-only mortgages

While option adjustable-rate mortgages (option ARMs) and interest-only (IO) mortgages have been the subject of much attention by the media and rating agencies recently, Rotella is comfortable with the business Washington Mutual does in those products. He points out that Washington Mutual has 20 years of experience with option ARMs and IO mortgages.

"If you're a consumer, it's a great product. What's more valuable than giving the consumer a choice, based on their cash-flow situation, on how they want to pay their mortgage? The key there is being disciplined about offering it to the right customers and disclosing well to those customers. I think we do a good job there, and monitor very closely the performance of that product," Rotella says.

Not every consumer is an appropriate customer for an option ARM, "but there are an awful lot that are. Our job is to make sure we're getting the product to the right customers," he says.

Washington Mutual sells into the secondary market the bulk of its mortgage production, Rotella adds. "The vast majority of what we hold in portfolio is ARMs. We also hold home-equity loans and lines, multifamily loans, small amounts of subprime, and of course with Providian coming on board, we'll be adding credit-card assets to our balance sheet," he says.

Part of Washington Mutual's strategy of remixing its balance sheet will be to hold a "somewhat lower level of mortgage loans as a percentage of the portfolio," Rotella says. "At the end of the second quarter, home loans were right around or a little bit under 50 percent of our portfolio. That will change even further as we close the Providian deal," he says.

Killinger addressed the interest-rate environment and concerns over a possible housing bubble in his second-quarter conference call with investors. Killinger told investors: "We are ... observing a potential overextension of the housing market in some regions of the country, and there are clear signs of speculation in some markets." Washington Mutual is being "very proactive in managing that risk," he said.

"You can't pick up the paper and not see an article about the housing boom," says Rotella. "There's an awful lot of opinions. What we believe is that there's some overheating in some markets around the country. That's something that's caused us to put some additional focus here to make sure that we've got the proper disciplines in place," he says.

"In some of those markets, there will be a flattening and potentially even some [price] declines, and we're concerned about that. At the same time, it doesn't seem like the economy is in a situation where we're going to have a significant problem nationally."

And Washington Mutual is "going into this with a very strong bias and focus on risk management," Rotella adds. "That includes managing market risk, credit risk and operating risk," he says.

A top-tier, end-game player

Does Rotella have any goals to move Washington Mutual higher than the No. 3 position in mortgage company rankings? "My belief is that setting arbitrary market-share targets or being bombastic about market-share targets doesn't get you anywhere, but [increases the potential for taking on more risk], Rotella says. "When you start to tell your employees, 'I want X percent' or 'I want to be No. 1,' it tends to lean the organization toward taking risk and potentially giving up profit for the sake of volume."

Rotella prefers to say the company will remain "a top-tier player. That means we will continue to be in the upper tier and will grow our market share. If we do that and stay focused, we're going to be the beneficiary as the market continues to consolidate to the larger players," he says.

Adds Schneider: "A successful mortgage operation is a lot about balance in terms of how you trade off bringing in market share versus your credit risk, or balancing your MSR risk with the level of originations you're doing."

Schneider says, "We're very committed to growth. We've added over 200 new salespeople on the retail side over the past four months. We've added a couple dozen wholesale account executives. We're having a lot of success in attracting talented people and growing our business. But we're doing it in a balanced, focused and disciplined manner."

Washington Mutual will remain strong in all three production channels. "Retail is a great opportunity for us to leverage the stores and increase our sales force. That's one of our primary focuses, but we'll continue to be a balanced player in the mortgage business and will be an active participant in wholesale and correspondent," Schneider says.

Ultimately Washington Mutual is "in this to be a long-term, end-game player," Rotella says. "We'll do that by just getting better every day, little by little. We feel good about where we are, and also know we have more work to do," he says.

Rotella's optimism is based on a combination of factors. "We start with a great culture, and great employees because of that culture. Add in the fact that the company has a very long history of branding, marketing and entrepreneurship," he says. Washington Mutual is committed to its home loans business, has great funding capabilities and a vast retail franchise, Rotella adds. "Toss in our subprime business and our large multifamily lending business. Then you add Providian to the table," he says.

"That combination, if we stay focused and execute properly, is going to give us advantages relative to monoline competitors and others who aren't as committed to the business," he says.

"We think it's just going to get better going forward," he says.

Mary McGarity is a freelance writer based in Trumbull, Connecticut. She can be reached at mmcgarity_l@charter.net.

RELATED ARTICLE: The Providian Deal

AS MORTGAGE BANKING WENT TO PRESS, Seattle-based Washington Mutual (WaMu) was planning to close its acquisition of San Francisco-based credit-card company Providian Financial Corporation on Oct. 1.

"Its focus on middle-market consumers makes Providian a natural fit for our business and a winning combination for both companies' customers." Kerry Killinger, chairman and chief executive officer of Washington Mutual, said when announcing the deal earlier in the summer.

Steve Rotella, president and chief operating officer at Washington Mutual, sees enormous potential for cross-selling between the two companies' customers. "When we close the deal, there's so many opportunities to cross-sell, the hard part is making sure we prioritize," Rotella says.

High on the list will be delivering a preapproved credit card to Washington Mutual customers and prospective customers in retail stores across the country, he says. "It's a huge benefit, and it's something our people are clamoring for and our customers want: a Washington Mutual-branded credit card," Rotella says.

Washington Mutual is also looking at offering a preapproved credit card to its home-loans customers, he adds. "If you've approved them for a home loan, you surely can approve them for a credit card. We can make it simple for them at the point of sale," Rotella says.

Rotella sees opportunities to cross-sell credit cards over the phone when bank or mortgage customers call in with a question or problem.

Providian's current customers are also likely candidates for Washington Mutual mortgages and other products, he notes. "Tapping into those customers, especially those who live within range of one of our retail branches, and offering them a checking account, a home-equity loan and a mortgage at the appropriate time is absolutely an opportunity for us," Rotella says.

The Providian acquisition makes sense for Washington Mutual "simply because they need to put more products in their distribution channels," says Richard Bove, an analyst with the St. Petersburg, Florida, office of New York-based Punk Ziegel & Co. "It also makes sense because mortgage yields are relatively low, and the cost of funding a bank is going up fairly rapidly as the Fed increases interest rates. Buying a portfolio of loans that have relatively high yields makes sense," he says.

The Providian acquisition is "a positive move" for both Washington Mutual and Providian, says Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc., San Francisco. "It's one of the few deals in banking where you can say it makes sense for both parties. They seem to have sort of split the difference between [pleasing] Providian shareholders versus WaMu actually making money on the deal," he says.

Adding credit cards "does diversify them a bit from mortgage exposure," Cannon says. But, he adds, "Less than 10 percent of their managed receivables are going to be in credit cards, so it's not going to be a significant divergence from their exposure to mortgages. We do expect if home prices start to go sideways or slip a bit, the ability for customers to refinance [credit] cards using home equity will ebb away, and as a result they'll go back to these cards. So to some extent I do buy the argument that there's some countercyclical nature to the credit-card business and the mortgage business. But only to some extent," Cannon says.
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Title Annotation:PROFILE
Author:McGarity, Mary
Publication:Mortgage Banking
Geographic Code:1USA
Date:Oct 1, 2005
Words:5530
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