Every year, one of every eight homeowning households, on average, needs a mortgage - and bankers know it. "Our customers demand mortgages of us - and we must be able to provide them, with our own people doing the providing," the thinking goes.
As a result, just about every major commercial bank in the country operates a vertically integrated mortgage origination department or mortgage banking subsidiary.
Except Wells Fargo. When an alliance struck four months ago is activated, California's Wells will let Norwest Mortgage, via a joint venture, originate home loans in its branches.
By now this transaction is old news, to be sure, but it continues to prompt the thought among senior bank management, "Does Wells Fargo's Bill Zuendt know something I don't know?"
Perhaps. Wells Fargo apparently believes it can't make an acceptable rate of return originating residential mortgage loans in a vertically integrated, in-house operation, or it wouldn't have outsourced the business.
Yet when they solicited bids, a variety of bank and nonbank mortgage companies were more than willing to compete to take on this business.
Notwithstanding the big investments some banks have made buying mortgage businesses, most bankers hate the cyclicality of the mortgage business and its high ratio of costs to revenue. So why would Norwest - or any big banking house - want to expand in mortgage originations?
From an outsider's viewpoint, the Norwest side of the joint venture with Wells Fargo is consistent with its strategic focus on mortgage and the real estate brokerage office point of sale.
With its earlier purchase of Boris Systems, Norwest has made a major financial investment in Multiple Listing Service technology, and clearly believes it can create a powerful presence in the real estate office - which means it also thinks that the office will continue to be the high ground in capturing mortgage loan referrals.
Norwest is also presumably investing toward a future in California financial services retailing, betting on the prospective value of dramatically higher brand-name awareness with Golden State consumers through mortgage lending that will enable it, per the agreement (as we understand it) to cross-sell follow-on products.
'n other words, Norwest seems to be investing in the traditional concept of a mortgage as a gateway product, from which a relationship with the customer - and an avenue to multiple product sales based upon information contained in the mortgage application - can be created.
If one believes in the gateway concept, the Wells Fargo rationale is less clear. Do they believe that the mortgage origination market is too saturated, the threshold for profitable critical mass too high? Do they not believe that mortgages are gateway products? Is their experience that follow-on sales to mortgage customers cannot be accomplished at any greater statistical frequency than random product purchases?
Clearly, they do believe that they have more profitable product businesses in which to invest their capital besides residential mortgage origination.
One other thing is certain: Wells Fargo will improve its bank-wide efficiency ratio by outsourcing the mortgage origination function - and few banks know as much about improving efficiency ratios as Wells Fargo.
And thanks in part to the rise of a new class of formidable national competitors, many institutions will opt out of this end of the mortgage business. And the pace of industry consolidation and concentration will accelerate.
Next: Different strategies and new industry structure are emerging.
Mr. Partridge is director of the financial institutions practice at Towers Perrin.
