Here is a story about sales practices that you’ve probably not heard.
During each of the waves of refinances in the stair-step decline in rates in the last dozen years, one bank in particular adopted an aggressive tactic.
To understand, a brief preamble.
MBSs, loan servicers and big banks
When a mortgage loan closes, the IOU is securitized into an MBS (mortgage-backed securities) which is sold off to Wall Street.
The “Street” wants nothing to do with the borrower or originating “lender” (since the 1980s we are all brokers, even big banks), and so the ultimate holder of the MBS sends a fee back upstream to hire a “servicer,” who does not own the loan but earns income in exchange for collecting monthly payments, handling tax and insurance escrows, and standing ready to foreclose in the event of default.
After the death of S&Ls (savings and loans) 25 years ago, big banks accumulated the servicing contracts. Bank of America, Chase, Wells Fargo — and the exception, rotten Countrywide — at one point each owned nearly $1 trillion in mortgage servicing contracts.
These contracts opened the door to cross-selling, a perfectly legitimate sales business, although adding mightily to the load of sales materials in recycling centers and landfills. Wells Fargo was best at because it was the inventor — to its credit, as far back as its prior incarnation as Norwest, it discovered the greatest value of being in the mortgage business: loan servicing clients as pigeons.
Another technical note: each loan servicing contract lasts as long as the loan — pay off the loan, sell the house, or refinance the loan, and POOF! The servicing contract evaporates.
Mortgage rates have fallen in irregular pattern ever since 1982. I cannot testify to the exact moment when Wells Fargo began an extraordinary operation, but several markers place it about 2000.
The extraordinary operation
Here is the scheme. First remember that Wells Fargo is a very large wholesaler of mortgages in addition to its retail originations.
Nearly all independent mortgage banks and brokers at one time or another found borrowers and closed loans that were sold through Wells Fargo wholesale. Wells spat the MBS out the back but retained the servicing contract, vacuuming up the clients of outside firms as well as its own.
The phone rings in the office of an independent mortgage banker. A client from two years ago wants to refinance from 4.50 percent to 3.50 percent.
The banker does all the hard work, explains the deal, the costs, the process, collects all the documents and runs a credit report. Off the loan goes into processing, the rest of the job running on automatic, but taking a considerable investment of time. (By the way, the servicer of the current loan is Wells.)
About a week later, another phone call from the borrower: “Say, Lou… I just got a call from Wells Fargo saying they noticed that I was refinancing, and they’ve offered a deal a little better than yours… can you beat that?”
If Wells can swipe the loan, it earns money for the new loan/MBS and for the re-creation of the servicing contract; thus, it can offer a loss-leader, which the mortgage banker can’t match.
How did Wells know? It bought notifications from the credit bureaus of any mortgage credit report pull on one of its servicing clients.
This is the same sort of “promotional” information for sale by the bureaus that gets pre-approved credit cards in your mailbox. Did you authorize those? Of course not, except in the fine print of some cardholder agreement you signed a zillion years ago.
Invasion of privacy aside, Wells’ tactic does no particular harm to the consumer — who gets a better deal, although perhaps not as skilled. The Wells’ caller is an indifferently trained phone solicitor, not a banker.
I am amazed and respectful of the many clients who perceived the sleazy aspect of Wells’ raid and refused, staying with us.
And we all adopted defenses, such as delaying the credit report request (the delay creating risk and inaccurate rate quotes) and found other ways to frustrate Wells data-prying.
The mortgage world is huge, but small. Other big banks adopted this tactic, but none like Wells.
Bankers at those firms told me they were provided with similar leads, but did not use them, feeling soiled.
Is the tactic illegal? Not that I know of.
Does Wells have a legitimate right to defend its servicing contracts? Sure — but one would hope in advance, not after the fact, blowing up someone else’s hard-won business.
The word is “ethics.” Not heard often enough.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at firstname.lastname@example.org.