Norwest Mortgage Unit: From Worst to First

After a massive buildup of staff and offices, Norwest Mortgage Inc. is taking the home loan market by storm.

In the first half of this year, the unit of Minneapolis-based Norwest Corp. became the nation's largest originator of mortgages, rising from No. 5 last year.

Elbowing Its Way

With volume of $5.9 billion, it pushed aside such rivals as Citicorp and the big California thrifts, according to information gathered by the American Banker. Norwest's total was up 64% from the first half of 1990.

Just six years ago, Norwest Mortgage was in the pits. Having suffered a huge loss while trying to protect itself from swings in interest rates, it was beating a hasty retreat from the industry.

But a new management team, drawn largely from Norwest Corp.'s consumer finance company, has rebuilt the unit from the ground up.

|A New Breed of Cat'

"I think they've done an exceptional job," said Scott McAfee, an executive vice president at Security Pacific National Bank. "It's a new breed of cat in the business. They bring a tougher sales attitude than you usually see."

The company has deployed an army of more than 1,000 retail loan officers and sales managers in 44 states, more than double the head count of 1988. These foot soldiers operate from some 290 mortgage offices and Norwest bank branches, up from just 42 sites in the mid-1980s.

Also, the company has plunged into the "wholesale" market, originating loans through a network of lenders.

Norwest sells its loans and most of the related servicing rights to others, minimizing both interest rate risk and credit risk. But it is starting to develop its own servicing portfolio and could eventually become a giant in that area.

|Piracy' Charged

Not surprisingly, the new Norwest has left some disgruntled rivals in its wake. For example, a senior executive at one large mortgage concern claims Norwest has been "pirating" the industry, using an overly generous commission schedule to raid other companies of their best loan officers. And there have been scattered reports of heavy price cutting by Norwest to win customers.

But executives at Norwest Corp. say they are well pleased with the unit's performance. Last year, the mortgage company earned $17 million after taxes, nearly 200% more than in the previous year. The profit represented 6% of the parent's total earnings, and the contribution is expected to soon hit 10% - even though other parts of Norwest also are growing.

"We're very excited about this business," said Les Biller, an executive vice president at Norwest Corp.

The new prominence of Norwest Mortgage comes as mortgage banking companies across the country are enjoying banner years. The companies - owned by banks, thrifts, and other types of companies - specialize in fixed-rate mortgages and sell their originations to other players, usually as mortgage-backed securities.

Riding the Fixed-Rate Wave

Norwest Mortgage and other mortgage companies have been helped by a surge in the popularity of fixed-rate loans over adjustable-rate models. Fixed-rate loans have been sporting some of the lowest interest rates in four years, reflecting bond prices.

Countrywide Funding Corp., the largest independent mortgage company, increased its originations 72% in the first half, to $3.1 billion. The mortgage unit of Sears, Roebuck and Co., meanwhile, posted an eye-popping 122% jump, to $4 billion.

Heading for $11 Billion

By contrast, the major thrifts, which concentrate on making and holding adjustable-rate loans, have been suffering steep declines in volume. At H.F. Ahamanson & Co., the nation's largest thrift company, home loan originations fell 48% in the first half, to $3.6 billion.

At Norwest, the recent gains follow a stunning 100% increase in originations last year. The company's $8.8 billion total for last year was nearly $2 billion ahead of the company's own projections.

"If Norwest hasn't set a record for speed of originations growth, they've come close," said Stuart Feldstein, president of SMR Research, Budd Lake, N.J.

Mark Oman, president of Norwest Mortgage, says originations should hit about $11 billion for all of 1991, up 25% from last year.

Whether that would clinch the No. 1 post for the year remains to be seen. For example, Fleet/Norstar Financial Group Inc., No. 3 for the first half, says it is on track to repeat 1990's total volume of $11.7 billion. (The acquisition of the Bank of New England franchise is not expected to contribute significantly to Fleet's total.)

And there is always Citicorp, which took the market by storm in the 1980s through its bank, thrift, and mortgage banking units. Despite suffering a well-publicized rise in mortgage delinquencies, Citicorp is believed to have written $5.5 billion of loans in the first half, roughly maintaining its pace of 1990 and trailing only Norwest.

Volume and Profits

Citicorp, which declines to disclose its mortgage volume until yearend, has been tightening its lending standards steadily since late 1989. As a result, industry sources said, the company has seen little need to pull back abruptly this year.

Mr. Oman of Norwest said a No. 1 rank is by no means his highest priority. Profits, not loan volume, have always been the goal of the new Norwest, he said. As it happens, however, massive originations have been a central part of the profit plan.

"We believe, and have demonstrated to ourselves, that economies of scale exist in originations," Mr. Oman said in an interview. "A lot of people don't believe that."

To encourage volume, Norwest pays its loan officers on a sliding scale - from 0.40% of the loan amount to 0.65% - with the bigger producers getting the fatter commissions. By contrast, the industry norm is a flat 0.50%, though some companies do have schedules similar to Norwest's.

To ensure profitability, the compensation of office managers is pegged to the profits of their offices. The office managers have authority to charge consumers lower rates than recommended by headquarters, but that can reduce the profits and pay.

"We compensate managers to be managers and empower them to do the job," Mr. Oman said.

Deal with Barclays

While refining its approach to originations, Norwest has been selling the bulk of its originations to the mortgage unit of Barclays Bank PLC.

This arrangement, formalized by a three-year contract signed in late 1989, has sent Barclays servicing portfolio through the roof - to about $20 billion, from $6.7 billion in 1989. This year, Barclays apparently will break into the top 10 services, up from No. 54 in 1989.

Some observers speculate that this agreement has ended up favoring Norwest, giving the company more room to offer incentives to loan officers and attractive rates to consumers. But other sources say the deal has been fair to both companies.

Mr. Oman declined to discuss the agreement in detail, except to say that the rights are sold to Barclays on a "nonrecourse" basis. That means that Norwest is left with no credit risk.

The Servicing Issue

Many observers say it is now essential for Norwest Mortgage to start building its own servicing portfolio, both to increase cross-selling opportunities for other Norwest products and to protect the mortgage unit from a rise in interest rates. Though rising interest rates curtail originations, they increase the value of servicing rights - because homeowners become less apt to pay off their loans ahead of schedule.

Mr. Oman said a servicing buildup is indeed under way. The company has begun keeping a greater portion of the rights it originates, and it has gained more through acquisitions of banks by its parent and a consolidation of servicing within the Norwest organization.

The servicing portfolio at Norwest Mortgage is now on track to hit $7 billion or $8 billion by yearend, up from $4.5 billion at the end of 1990, Mr. Oman said.

"It's not perceived that we're a big servicer," he said. "But there are not a lot of $7 billion servicers out there."

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