If you’ve recently helped a New York City homebuyer lock in a mortgage, there’s a good chance you worked with Wells Fargo.
As the largest mortgage lender in the United States, Wells Fargo has recently attained an unprecedented grip on the home loan business, originating 33.9 percent of all mortgages in the country in the first quarter of 2012, according to widely cited figures from the trade publication Inside Mortgage Finance.
That’s more than triple the share of its closest competitor, JPMorgan Chase, which accounted for 10 percent.
Nationwide, as competitors bruised by the subprime mortgage crisis have curtailed their home loan activities, Wells Fargo has embarked on an aggressive lending strategy to generate revenue for shareholders.
Among U.S. banks, Wells Fargo is “the engine right now for real estate,” said Christopher Whalen, a columnist for the real estate publication Housing Wire and senior managing director of Manhattan-based investment bank Tangent Capital Partners.
That engine is also powering New York City, where Wells Fargo’s dominance is arguably even more pronounced. While local data on mortgages is hard to find, some estimate that the bank now accounts for as much as 50 percent of the residential mortgage market here. (A Wells Fargo executive said that estimate seemed “very high,” but that the company could not provide its own alternative estimate.)
Not only has the bank forged partnerships with some of New York City’s biggest brokerages in recent years — including Prudential Douglas Elliman, Brown Harris Stevens and Halstead Property — it has also marshaled its vast balance sheet to lend at “nonwarrantable” buildings, which often scare away lenders because they do not meet Fannie Mae guidelines for mortgage purchases.
“Everybody says ‘Wells Fargo’ — they’re on the tip of everybody’s tongue,” said Howard Morrel, a senior vice president with Brown Harris Stevens who often works with the bank, noting that it has a reputation for having the lowest interest rates available.
Partly because of low rates on jumbo loans, Manhattan Mortgage managing director Debra Schultz estimated that Wells funds about half the mortgages she arranges.
Indeed, sources said that Wells Fargo can undercut its competition by half a percentage point because of the large pool of funds it has from depositors with low-interest savings accounts. Wells is “using [its] funding advantage and the need to generate revenue [for shareholders] as a big hammer in the marketplace today,” Tangent’s Whalen added.
Still, in the aftermath of the subprime lending crisis, some observers are wary of any “too big to fail” financial institution gaining a stranglehold over the marketplace — particularly an institution so heavily invested in the housing market.
“It’s never good when one company has too much,” said Rolan Shnayder, director of new development lending at H.O.M.E., a mortgage bank that writes its own home loans, but sells some of those to bigger lenders, including Wells. “That’s not good for anybody.”
On the books
Headed by CEO John Stumpf, Wells has $1.3 trillion in assets, making it the fourth-largest bank in the country after Chase, Bank of America and Citibank, according to news reports and SEC filings.
However, while Wells was founded in San Francisco in 1852, it’s actually a relative newcomer to the New York City retail banking scene, although its home-loan operations have been here since 1998 when it merged with Norwest Corp.
The lender established its first New York City branches in 2009, when it bought the failing bank Wachovia, along with its 22 locations in Manhattan and the Bronx.
Wells now employs 96 mortgage lending professionals in New York City, led by Eric Gotsch, who oversees the bank’s retail home loan business in New York and Connecticut.
Gotsch’s team funded more than $2 billion in home loans locally in the first half of 2012 — about 40 percent for home purchases and 60 percent for refinancings, he said. That puts it on track to surpass 2011’s $3.4 billion in home loans by the end of the year. Statewide, Wells originated about $5.7 billion in the first quarter, up from $5.1 billion a year ago, according to the bank.
By contrast, BofA’s local mortgage operation employs 50 people, according to Bob Donovan, the bank’s regional mortgage executive in New York. Citibank’s local branches employ 65 home loan specialists, although the bank has partnerships with an additional 50 mortgage professionals, a spokesman said.
Donovan declined to comment on the volume of BofA’s mortgage originations in the city, although nationally the bank issued $15.2 billion in home loans in the first quarter of 2012, according to its most recent quarterly financial report. Citibank also could not provide regional volume figures.
Nationally, Wells funded $129 billion worth of first mortgages in the first quarter of this year, according to its most recent financial report. The bank also reported that income from mortgage banking had reached $2.87 billion, up 42 percent from the same period last year.
Of course, some of that growth is the result of an industry-wide increase in mortgage lending and conditions (historically low interest rates and historically high rents) that favor home purchases.
Additionally, Gotsch attributed some of the growth of Wells Fargo’s mortgage origination business to its focus on encouraging referrals and converting depositors to borrowers.
But the bank has also taken what Gotsch called an “in-depth approach to new construction condominiums,” working with developers and condo boards to turn buildings into better prospects for lending to homebuyers.
In recent years, Fannie Mae has stepped up enforcement of guidelines determining what it considers to be a safe investment. However, these federal rules are often an odd fit for New York City, where otherwise financially sound buildings could be deemed risky if, for example, a commercial space takes up more than 20 percent of a building.
In some cases, lenders will work with developers in the early stages of new construction to ensure a project will eventually be “warrantable.”
“Wells Fargo, in particular, was very aggressive in going into new developments,” said Robert London, a private mortgage broker at Manhattan-based lender Thomas Funding Group, which issues both residential and commercial loans.
Lenders — such as Bank of America, H.O.M.E and Astoria Federal Savings Bank — will also determine whether older, nonwarrantable buildings are financially sound in order to issue mortgages to buyers, regardless of whether the building meets Fannie Mae’s checklist. Indeed, BofA recently announced that it would no longer sell loans to Fannie Mae. But in this arena, Wells Fargo has earned a reputation for being more flexible than its big-bank peers, sources said.
For example, Metropolitan Tower does not meet Fannie Mae’s requirement that buildings set aside 10 percent of common charges each year for a reserve fund, according to Brown Harris Stevens’s Morrel and his colleague, Leslie Hirsch, who frequently broker deals in the 235-unit condo building at 146 West 57th Street. Wells Fargo is footing the bill for an evaluation so the bank can waive that requirement and start lending there, they said.
“When you have an active lender like that, it’s fantastic, because they actually go out and try to get these developments compliant,” said Orest Tomaselli, CEO of Westchester-based National Condo Advisors, which helps ensure buildings are compliant with federal guidelines. Tomaselli has worked with a number of New York City developments.
Top: Depositors have helped fuel Wells Fargo’s mortgage business. Bottom, from left: Eric Gotsch oversees Well Fargo’s retail home loan business in New York; Wells Fargo CEO John Stumpf; and Wells Fargo investor Warren Buffett.
Rivals on the retreat
Wells has also benefitted from a marketplace that consolidated during the economic crash, when rivals like Countrywide Financial and the Independent National Mortgage Corp., better known as Indy Mac, fell apart.
Additionally, this year the insurer MetLife Inc. left the mortgage origination business (although its MetLife Home Loans division will continue servicing existing loans).
Wells Fargo has “filled the void” left by the disappearance of these lenders, said Jonathan Miller, president of appraisal firm Miller Samuel. He added that in a short period of time, Wells went from being “not a factor” in New York to becoming “a dominant player in the market.”
Described by experts as an aggressive but careful lender, Wells is also keeping its relationships with mortgage brokers intact at a time when other big banks — some of which suffered steeper subprime losses — are shutting them down, sources said.
In February, Citibank said it would shutter its wholesale lending division, effectively ending its work with mortgage brokers, to focus on retail and other channels, “which have the highest opportunity of increasing long-term engagement” with customers. The move followed a similar announcement by BofA in 2010 and from Chase in 2009.
Banks are somewhat hesitant to work with mortgage brokers, whose reputations have taken a beating in the wake of the housing crash, sources said. Plus, closing down those channels may avoid red tape and allow them to focus on finding borrowers among their existing clients.
Chase did not return a request for comment.
But ending relationships with mortgage brokers also shuts off a method of reaching customers, sources said. After all, to get a home loan, many borrowers start by calling a mortgage broker, Whalen noted.
In October, BofA took the additional step of cutting off ties with correspondent lenders — smaller lenders who issue mortgages themselves, but then sell the loans to other, bigger lenders. Since then, BofA’s mortgage originations have dropped 73 percent year-over-year, according to the bank’s most recent quarterly financial report.
“The more channels that banks have to originate business from, the more business that they’re going to get,” said H.O.M.E.’s Shnayder, estimating that as a correspondent lender he sells about 30 percent of his loans to Wells, amounting to roughly $5 billion over the years.
Meanwhile, Wells loaned $68 billion through its wholesale and correspondent lending channels in the first quarter of 2012, nearly double what it did in the same period last year, according to its last financial report. It loaned $61 billion through its retail channel, or about 24.5 percent more than a year ago.
Despite its competitors’ moves, Wells remains “committed” to its wholesale and correspondent lending business, a bank spokesperson said in a statement.
At the same time, Wells has made alliances with local residential brokerages, including a “marketing relationship” with Terra Holdings, which owns Halstead and Brown Harris Stevens. Both the firms and Wells declined to comment on specifics, but sources told TRD that brokers get informational presentations from Wells bankers, while the bank no doubt benefits from referrals, as well as having its logo displayed on the firms’ websites.
Coincidentally, Halstead’s executive director of development marketing, Stephen Kliegerman, is married to a private mortgage banker at Wells. Kliegerman declined to comment.
Additionally, in 2007, a Wells Fargo affiliate teamed up with Prudential Douglas Elliman to form DE Capital Mortgage, a home loan originator that works with the brokerage’s customers and others.
DE Capital did not respond to a request for comment.
Too big?
Not everyone welcomes Wells Fargo’s market dominance, especially in these post-crash times, when memories of once-sound financial institutions toppling are still fresh.
In addition to the market disruption of an institution of Wells’s size faltering, some observers argue that bank consolidation limits choices for consumers.
“Any time you have an environment that doesn’t encourage competition, the consumer loses,” Miller said.
One lender said that a few months ago, he began to hear complaints from borrowers and real estate agents about loan processing times at Wells Fargo, where the huge volume of loans was apparently bumping up turn times to two weeks, after a three- to four-week underwriting process.
More seriously, in its most recent financial report, Wells disclosed that the U.S. Department of Justice believes it could bring civil claims against the bank in connection with mortgage origination practices that allegedly violated fair lending laws. Wells contested this assertion in the filing. In the past, SunTrust Banks and Countrywide have settled lawsuits with the DOJ over similar claims.
Like other banks, Wells also has nonperforming first mortgage loans on its books — about $10.7 billion worth, as of the first quarter of this year — although that number has been steadily declining. All told, Wells’s troubled assets account for about 3.5 percent of its total loans.
Still, concerns over Wells’s market control may be overblown, considering how tough federal guidelines are, observers said. In other words, even if Wells tightened or loosened its mortgage lending standards, Fannie Mae and Freddie Mac would still hold the biggest sway over the market. And the bank’s biggest investor, Warren Buffett, remains bullish, having increased his stake in the company several times in the last year.
A larger danger for Wells may be its deep concentration of real estate investments during a time when the market is still unpredictable, sources said.
While Wells may be insulated from the riskier securities sold on Wall Street, it relies heavily on mortgage originations (as well as loan sales to Fannie Mae and Freddie Mac), Whalen said. A rise in home loan defaults is a less likely prospect in New York City than the rest of the country, but if the level of defaults starts to creep up, Wells could take a hit, he said.
Even loans to borrowers with high credit scores who put 20 percent down could “turn to dust,” or lose their value, several months from now if the market takes another downward turn, Whalen said.
But Wells shows no signs of slowing down its mortgage originations.
In January, the bank held a Wild West–themed event for about 500 of its mortgage bankers at a hotel outside San Francisco, according to a Bloomberg News report from last month.
In an apparent nod to the bank’s market share, the invitation read: “40% or BUST!!”