Mitigating mortgage arrears: how one US bank manages the process

Banks across Ireland and globally have spent the last 5 years struggling to contain and clean up the mortgage delinquency mess. Unfortunately, for Irish banks, the problem is only getting worse. In markets such as the US, banks are finally exiting the mortgage arrears crisis where some banks there are faring better than others.

Homeownership

Homeownership

In an interview with the BBC, the Head of Wells Fargo, the largest mortgage lender in the US has emerged as the most valuable bank in the world. But how did it do this?

Like most other major banks — Wells Fargo has not gone unscathed. The bank has agreed to more than $6 billion in settlements related to servicing and foreclosure practices. The bank has gained a reputation for very conservative loan policies and longer due-diligence cycles. It is this particular approach to lending that is the foundation to its healthy financial position.

Franklin Codel, executive vice president and head of mortgage production for Wells Fargo leads all activities around sales, underwriting, closing and processing of Wells Fargo originated mortgages.

Codel describes mortgages as the second-biggest source of customer relationships with Wells Fargo after checking accounts (current accounts), so it’s a big part of the lifeblood of bringing in new people and earning deeper relationships over time. For example, customers with Wells Fargo mortgages looking to refinance tend to stay with the bank over 50% of the time. [Refinance deals are often incentive for people to change banks.] If someone is moving, we set them up with local representatives in the next city.

On the issue of risk assessment and risk management

Codel says that in order to help its customers succeed financially, manage risk in the business and “do the right thing”, the bank has a philosophy of lending well and understanding the mortgage model. This means a balance of doing what’s right for the consumers, as well as the bank and investors. In 2005 and 2006, [some] lenders were lending based on what investors would buy, not necessarily what was right for the customers. Having a deep appreciation of the long-term view and the business model itself has helped guide the bank making a lot of decisions over the years about how to be an effective lender.

On the issue of risk management, education, outreach and maintaining low delinquency rates

Codel says that he believes this must start with strong responsible lending principles and prudent underwriting. For these reasons, he says the bank didn’t originate some of the loan products [that historically have] higher default rates. He also says that the bank often has more conservative credit policies than those required for selling loans into government programs (such as Fannie Mae and Freddie Mac).

Codel goes onto add that the bank was never driven to grow market share as he believes this leads to dangerous decisions. Market share is the result of a good value proposition, a good sales team, a good price and doing the right thing for customers. He cites that the bank has recently made tremendous investments in outreach through home preservation workshops and invited customers who may be having financial difficulties to explore loan modification or other alternatives besides foreclosures. The local outreach programme helps customers who are afraid to admit they have a problem, afraid of calling into the large bank. [One of the most toxic mortgage products Wells Fargo acquired when it purchased the struggling Wachovia Bank in 2008 was known as Pick-a-Pay loans, originated by a bank earlier bought by Wachovia. Wells Fargo has modified 115,000 of these loans and forgiven $5.3 billion in principal on a portfolio that was $115 billion when purchased.]

On the matter of owning its originated loans as opposed to originating-to-sell

Codel believes that ownership of loans has helped the bank with more creative thinking. He also says that he believes that it is very important to control losses and help customers who wanted to stay in houses. With a bank-owned loan portfolio, principal forgiveness is easier and there’s more flexibility. The bank directly owns the loan and they are the investor so they have more room to offer deals that make sense. Codel does not disclose principal forgiveness figures.

On the issue of strengthening the ties between mortgages, borrower education and financial planning

Codel says that not all customers that approach the bank are ready for homeownership, so they are giving people tools to help prepare them for that before they return to the bank when they are ready. For customers who have been declined, the bank offers to get them started on credit counselling and paying for initial sessions.

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