Both banks and homeowners across the United States and around the world have spent the past five years cleaning up their balance sheets, negotiating with governments and collectively licking their wounds from the frenzied mortgage markets of the last decade. Now, as the dust clears across the financial sector, irony abounds as the largest mortgage lender in the US has also emerged as the most valuable bank in the world.
Throughout this period, San Francisco-based bank Wells Fargo has consistently reported lower-than-average mortgage delinquency and foreclosure rates compared to other large banks in the US. As of June 30, the bank serviced $1.5 trillion in home loans originated or securitized by others, in addition to the $367 billion in residential mortgages it owns and services.
Like most other major banks — those that survived the crisis at least — Wells has not gone unscathed. The bank has agreed to more than $6 billion in settlements related to servicing and foreclosure practices. And, even as the bank continues to work through modifications and foreclosures, Wells has gained a reputation for very conservative loan policies and longer due-diligence cycles — visibly frustrating customers in numerous online forums.
Both the lower delinquency rates and some of the recent customer complaints may be the result of its approach to mortgage risk management: lending more conservatively mitigates risk for both the borrower and the bank.
BBC Capital spoke with Franklin Codel, executive vice president and head of mortgage production for Wells Fargo, about this two-sided view of mortgage lending.
Based in West Des Moines, Iowa, Codel leads all activities around sales, underwriting, closing and processing of Wells Fargo originated mortgages. His division has experienced the ups and downs of a tumultuous decade in the mortgage and housing markets and is currently the largest originator in the US.
BBC Capital: How do you and the bank view customer relationships, specifically through home lending?
Codel: Mortgages are the second-biggest source of customer relationships with Wells Fargo after checking 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.
BBC Capital: How does the bank view the risk equation, specifically when working with customers to originate mortgages?
Codel: To help our customers succeed financially, manage risk in the business and “do the right thing”, you have to first lend well and understand 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 us in making a lot of decisions over the years about how to be an effective lender.
BBC Capital: What type of risk management, education and outreach does the bank do to maintain low delinquency rates?
Codel: This starts with strong responsible lending principles and prudent underwriting. For these reasons, we didn’t originate some of the loan products [that historically have] higher default rates. We will — at times, and in many places — have more conservative credit policies than those required for selling loans into government programs.
We were never driven to grow market share. 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. For example, we have recently made tremendous investments in outreach through home preservation workshops and invited customers who may be having financial difficulties. We’d like to see if we can find a solution like a loan modification or other alternative besides foreclosures. This local outreach helps customers who are afraid to admit they have a problem, afraid of calling in to the large machine. [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.]
BBC Capital: For the bank, how has owning a large amount of the mortgages it originates — as opposed to selling the loans into vehicles bought by investors — helped this process?
Codel: Ownership of loans has helped us with more creative thinking. It’s very important to control losses and help customers who wanted to stay in houses. With an owned portfolio, principal forgiveness is easier and there’s more flexibility. We own the asset, we are the investors, we can do what we think makes sense. [Wells does not disclose principal forgiveness figures.]
BBC Capital: Have you strengthened the ties between mortgages, borrower education and financial planning?
Codel: Not all customers are ready for homeownership, so now we are giving people tools to help prepare them for that and come back to Wells Fargo when they are ready. For customers who have been declined, we are offering to get them started on credit counselling and paying for initial sessions. We can’t do the budgeting for them, we can’t do the saving for them but we can certainly lay out the roadmap.