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Bank of America Mortgage Exit Opens the Door for Wells Fargo

Dan Freed

Bank of America’s decision to stop buying mortgages originated by other banks looks likely to pave the way for Wells Fargo to increase its market share in what is known as the correspondent mortgage business.

Eric Stoddard, executive vice president in charge of that business for Wells Fargo , would not comment on market share goals, citing a "quiet period" ahead of Wells Fargo's announcement of its third quarter earnings results.

Bank of America branch, New York City.
Oliver Quillia for

However, he stressed in an interview with TheStreet that the correspondent channel remains an important part of the company's mortgage business because it helps replenish the $1 trillion-plus servicing portfolio which would otherwise shrink since many borrowers have been paying off their mortgages early in order to refinance at lower interest rates.

Of course, the refinancing activity also brings in new mortgages, and Stoddard says the overall mortgage market is growing as a result.

"Are we expanding as a mortgage company and as a channel? Yes — along with the market. I can't tell you how much or anything else, but yes and we're proud of it."

In deciding to exit the correspondent business, which accounted for $180 billion or roughly half its mortgage volumes last year, Bank of America said it did not see an opportunity to "deepen the relationship" with customers since the borrowers had not chosen to do business with the Bank of America in the first place.

Other large banks are taking a similar view, according to Jack Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, who runs a website for borrowers called "The Mortgage Professor."

"It is a very competitive business. All the banks are in it for the same reason they're in the wholesale business: because all of those smaller entities have access to customers that they don't have access to. But the world has changed quite a bit. The market structure has changed, and the big guys are moving toward the view that they can get away with delivery under their own offices under their own name, which they much prefer to do because it involves customer relationships and their identity as a bank which results in their being able to charge a premium price or at least generate extra profits through the sale of other services to customers who are customers of theirs, not customers of some other entity."

However, the fact that Bank of America has exited the correspondent business may suddenly make it more attractive to the other big lenders, Guttentag says.

Wells Fargo's Stoddard, however, said the bank's strategy hasn't changed as a result of Bank of America's decision. In contrast to Bank of America, Wells Fargo sees the correspondent mortgage business as providing an opportunity to win over new customers through its mortgage servicing business.

"We can give them our best in class servicing and there's an introduction there. A relationship has begun that otherwise doesn't exist. And what bigger financial [matter] generally [is there] for an American [than] their home mortgage? It's a big relationship is the point, right? So we find value in that. We continue to find value in it," Stoddard said.

If all four of the U.S. megabanks were to exit the correspondent mortgage business, it would be a "jolt," Guttentag said. However, in a such a case he believes the next largest group of banks such as U.S. Bancorp and PNC Financial would quickly move to pick up the slack. A JPMorgan Chase spokesman declined to comment, on the bank's correspondent mortgage strategy and Citigroup did not respond in time for publication of this article.

Bank of America's decision, of course, may be affected by its broader strategy of shrinking its balance sheet, cutting expenses and shoring up its capital position. While many financial companies are playing defense due to the weak economy, Bank of America has been particularly troubled as a result of problem mortgages it acquired with its purchase of Countrywide Financial in 2008 — a deal now viewed as having been a disaster for the franchise.


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