Mortgage Lending Made Simple

By now most of you have likely read, heard or seen some alarming reports about Wachovia over the last few days. These stories have spurred rumors and misconceptions through out our community. Here is the story, as I know it.

Approximately 2 years ago, Wachovia acquired Golden West Financial. This was driven by the success Golden West had with mortgages from the bank branches. Wachovia began to model its’ mortgage operation after that of Golden West. In doing so, they actually created two mortgage origination teams, one for the banks and one for Realtors and the public. This also created parallel management teams, also known as duplication of expenses.

After approximately two years of diligent work, coupled with the market challenges, Wachovia has decided to return to mortgage banking as it used to be. This eliminates the parallel management.

In addition, Wachovia has closed the wholesale division, which means Wachovia WILL PROCESS AND FUND ONLY LOANS ORIGINATED by WACHOVIA EMPLOYEES, not loans originated by mortgage brokers or other lenders. This is a policy shared by a number of other mortgage industry leaders.

It is these two actions that represent the vast majority of the staff reductions announced by Wachovia.

Wachovia, as is the case with most other mortgage companies, is returning to a mortgage market that is served predominantly by government insured or guaranteed loans. That is, FHA, VA, RD, VHDA and conforming conventional loans.

In the past, as the market grew rapidly, there was great pressure on lenders to expand their product mix to accommodate home buyers who did not fit the standard mold, much like putting a square peg in a round hole. As we have seen, this eventually lead to disappointing results. In a nut shell, that is what caused the mortgage debacle.

There is not a major participant in the mortgage industry that has not been hurt by this fall. The result is an old adage, “Only the strong will survive.” To that end, Wachovia is financially strong, they have a good cash reserve position, without borrowing huge amounts as some other mortgage companies have done.

Yes, there are rumors that another bank will buy Wachovia. Such rumors are always on the street. Those rumors are also not limited to the purchase of Wachovia. They exist for several of the top 15 banks in the country.

In case you were not aware, a bank can not simply go into a community and open a branch, they must have FDIC approval, and in some cases, it is ruled that the community has reached a saturation level and the only way to gain entry into that market is to purchase an existing bank or branch.

I ask that you consider your history with me and my 35 years of history and experience in the local financial community. I have included excerpt from Bob Steel’s memo of 7/22 for your information (see below).

Please do not hesitate to contact me with any questions you may have.

EXCERPTS FROM

FROM:   Bob Steel, CEO

RE:         Second Quarter 2008 Financial Results and Related Actions

Cutting the dividend and eliminating positions were difficult decisions. But both are the right moves for our company at this time. I am confident that these actions, and others we will take in the weeks ahead, will allow us to be good stewards for our company so that we can serve-at the highest level-our shareholders, customers and communities.

Here are some second quarter details for our four core businesses:

• The General Bank posted earnings of $1.1 billion and total revenue of $4.7 billion, which reflects strong sales momentum.
  Wealth Management reported 9 percent growth in year-over-year earnings to a record $98 million on 6 percent revenue growth. Net interest income increased 11 percent on 10 percent loan growth.
  The Corporate and Investment Bank has returned to profitability with earnings of $209 million, reflecting lower market disruption losses compared to the first quarter of 2008.
  Capital Management delivered earnings of $297 million on 29 percent revenue growth from the second quarter of 2007. The group posted an 18 percent increase in net interest income year-over-year, driven by the A.G. Edwards acquisition and solid growth since then.

We are a strong company, as these underlying numbers show, but we still have significant challenges ahead of us. It’s important to recognize the environment may become tougher before it improves. We are taking decisive actions to correct issues, address challenges head on and continue moving forward. We also are focused on our short-term priorities of growing, protecting and preserving our strengths: our capital, our liquidity and our core businesses and the earnings they produce.

If you enjoyed this post, please consider subscribing.  Subscribe in a reader or Subscribe by Email
We respect your privacy and your information will not be shared.