ABN AMRO's ascent

Michigan-based ABN AMRO Mortgage Group is having a great year. The mortgage banking conglomerate recently bought the Web name "mortgage.com" and moved its National Lending Center into the high-tech space occupied by the former mortgage dot-com in Florida.With business booming also at its huge wholesaler, InterFirst, everything is looking sunny.

WHEN WILLIAM NEWMAN HANDS OUT HIS BUSINESS CARD, HE HAS A CHOICE. He could give the one that reads executive vice president of ABN AMRO Mortgage Group Inc. (AAMG) or he can give his InterFirst Wholesale Mortgage Lending card, which is also appropriate since he's president of that company. * It's a little complicated, but does make some sense since InterFirst is a division of ABN AMRO Mortgage Group, Ann Arbor, Michigan. To company outsiders, however, the proliferation of names for different business units is sometimes confusing-and it has gotten even more complicated as ABN AMRO Mortgage in December acquired the mortgage.com URL from the defunct company of the same name and is using that site as its e-commerce venture. * Now the header of the company's Internet site reads mortgage.com, with a subhead in smaller type reading, "by ABN AMRO," and Newman's second business card also reads "InterFirst Wholesale, a division of ABN AMRO Mortgage Group Inc."-and with that, the company hopes clients and consumers get the message that it is all just one big, happy family.

The mortgage group, an indirect subsidiary of Dutch banking giant ABN AMRO N.V, was formed in 1999 from several entities that had previously been consolidated for management purposes in 1997, "and now we are trying to establish a brand," says Ursula Crenshaw, a senior vice president of marketing for AAMG. "I'm not saying it's not a challenge, but we are beginning to make some headway."

Part of the problem is that ABN AMRO-although it is the sixth-largest bank in the world, with total assets of more than $505 billion and operations in 70 countries-does not have a large "footprint" in the United States, so it has been reluctant to alter existing names that are familiar to customers. Why change all company divisions to an ABN AMRO brand, when it is likely, at this point, the name doesn't carry a lot of weight in this country?

Yet, things are different on the corporate level. ABN AMRO's U.S. operation is called ABN AMRO North America Inc. The Chicago-based holding company boasts assets of $170 billion and more than 18,ooo employees, one of its primary subsidiaries being AAMG-which contributes 20 percent to 25 percent of the profits for the North American banking unit.

AAMG has quietly grown into a major contender in this country's mortgage industry. According to National Mortgage News' quarterly data report, AAMG ranked as the sixth-largest mortgage originator with first-quarter 2001 numbers of $13.15 billion and as the No. i originator with second-quarter numbers of $20.69 billion, and the ninth-largest loan servicer with first-quarter 2001 numbers of si 16.5 billion and second-quarter numbers of $125 billion.

The company operates nationally as a wholesale and correspondent lender through InterFirst Wholesale Mortgage Lending, and as retail mortgage company in the Midwest through a number of different operational units. Today about go percent of its loans are conventional and the remaining lo percent jumbo, according to Newman. In total, some 70 percent to 75 percent of its loans are sold to either Fannie Mae or Freddie Mac.

Other AAMG units include the National Lending Center, Sunrise, Florida, which combines loan customer retention and the new e-commerce venture; ABN AMRO Apartment Lending, Chicago; and AAMG Capital Markets, Sunrise, Florida.

Making it in the Midwest

While AAMG's retail operations are very strong in the Midwest, one needs to pick through the various operational units, each with a different brand name, to get a sense of just how well the company has been doing in its traditional base of operations.

Mark Sofyanos holds the title of senior vice president in charge of AAMG's Midwest retail division. Reporting to him are the company's LaSalle Home Mortgage Operations in Chicago and ABN AMRO Mortgage, which operates in Minnesota. Although AAMG also retails mortgages in Michigan, that division carries a completely different name, Standard Federal, and reports to a different executive.

"In Chicago, LaSalle Home Mortgage is a brand name with a large bank footprint, so that's why we carry the name there," explains Sofyanos. "In Minnesota, we are in Bloomington and Rochester, and since we don't have a bank footprint there we go by the name of ABN AMRO Mortgage."

In Michigan, Standard Federal also has a large branch system-or footprint-and has traditionally been a dominant player there (and to a lesser extent in Ohio and Indiana), so that operation has been run separately, says Stanley Rhodes, president of AAMG. "Standard Federal Bank retail lending holds a market share of about 18 percent, and that's pretty dominant considering the major players in that Michigan market."

Through the first six months of 2001, Standard Federal originated $3 billion in mortgages, which Sofyanos says "are very strong numbers." And those figures will get even hardier as earlier this year Standard Federal, which has $20 billion in assets, completed its acquisition of Farmington Hills, Michigan-based Michigan National Bank.

"Michigan National was not a big mortgage lender, so there will be no immediate kick to the bottom line," says Rhodes. However, the commercial bank does run 160 branches throughout Michigan, which should expand Standard Federal's mortgage distribution even more. "We will do about $7 billion with Standard Federal this year, and once we get Michigan National up to speed we should do $9 billion to $10 billion," says Rhodes.

This is not to say all the company's retail mortgage action is in Michigan.

Back in 1998, Sofyanos' Midwest mortgage division (not including Standard Federal) racked up $1.3 billion in originations during that refi boom year, according to the company. Business over the next two years chugged along steadily and unspectacularly, with origination volume topping out at just less than si billion in 2000. With the refi genie once again out of the bottle, the Midwest mortgage division of AAMG has had all its wishes fulfilled-and then some. Through the first six months of 2001, origination volume already passed $1.2 billion, according to Sofyanos. "We will come in at $2.4 billion,"he predicts.

Both Sofyanos' Midwest division and Standard Federal have even more to brag about. Through technology, the retail mortgage units have pushed much of the decision-making on loans to the sales force, thereby removing numerous intermediate steps.

"We had some loo-plus people supporting a billion dollars' worth of business," says Sofyanos. "We have taken that down to 65 people by empowering the sales force to handle a majority of the approval process. Whereas it used to cost us $1,500 to process a loan, in February that cost dropped to S413."

Admittedly, some of that is due to refis, which are simpler to process and have doubled volume, but Sofyanos maintains his company's core business cost to process a loan remains at the $450 mark.

I can get it for you wholesale

The revenue coming from retail operations plus the Capital Markets Group and National Lending Center (including mortgage.com) amounts to 35 percent of AAMG's total, according to Rhodes. The rest of the company's revenues is thrown off from the company's wholesale lending unit, InterFirst Wholesale.

It should be noted that InterFirst comprises about 65 percent of loan production income. AAMG total income is comprised of production income and servicing income. The ratio of production/servicing income will vary by market environment. When originations are high due to refi production, production income is high and servicing income is low. When loan production is low, servicing income increases due to slower repayment. In a normalized environment, the group's income distribution is about 60 percent production and 40 percent servicing.

Back in the late 1980s and early 1990s, when Rhodes and Newman were running InterFirst, it was a federal savings bank doing business as a mortgage bank in that most of its loans were mortgages. That attracted the interest of Standard Federal, which bought InterFirst in 1993. "We had bank branches and retail, but Standard Federal didn't have a wholesale piece and that is what they acquired us for," says Newman. "After the acquisition they took out the wholesale piece, and it has since been run as a separate division."

InterFirst basically has two types of customers: the independent mortgage broker and correspondents, the latter of which include mortgage banks and smaller financial institutions.

This has been a solid business for AAMG. Last year, wholesale volume hit $21 billion, down slightly from 1999 when volume peaked at $23 billion. Through the first six months of 2001, volume has already reached $28 billion and Newman guesses the year should close out at $45 billion in wholesale loan volume.

Sure, Newman admits that volume is up 40 percent to 50 percent for the industry in general, but "while the rising tide lifts all boats, our year-over-year production for the first half of 2001 is up 250 [percent] to 300 percent," he says.

Part of the reason for InterFirst's extraordinary success this year has been the fact that it had pumped up its sales staff even before the boom hit. A year ago, 60 wholesale account representatives shopped ABN AMRO loans for InterFirst. Today, 95 do the same.

"We actually started the hiring strategy before the market turned in January," Newman says.

InterFirst now claims it has io percent of the broker market.

"We don't have the illusion that we can maintain this production level," Newman adds. InterFirst originated loans valued at $6 billion in June. When the market turns, however, Newman suspects the extra sales staff will be even more valuable. "We will have to go in and maintain relationships just to keep even," he says.

The company now does business in all states except Hawaii, and even with all the new hires Newman still feels InterFirst is underrepresented in such key states as California and Texas.

One of the things InterFirst Wholesale does well is bring its technology to its customers.

Duxford Financial Inc., Newport Beach, California, closes about $500 million a year in purchase-money residential loans. "With 65 employees, we accomplish our objective by taking advantage of the technologies that are available in our industry and being utilized by institutions like ABN AMRO Mortgage," says Mark Carver, Duxford's president.

Duxford, a wholly owned subsidiary of Newport Beach-based William Lyon Homes Inc., specializes in what Carver calls the builder business. "Our primary function is to originate, process and capture as many loans as we can for our builders,"he says. The company began working with ABN AMRO Mortgage in 1996, and now Duxford does 25 percent to 30 percent of its loans through ABN AMRO.

"What attracted me to them initially was their price and automation," says Carver. "For example, the efficiency of locking, obtaining loan approvals, drawing down documents and funding online."

In June, InterFirst began offering its customers fully automated underwriting services as part of its expansion with Mortgages Online at InterFirst (MOAI(TM)). In addition to automated underwriting, the expansion allows customers to submit loans electronically, receive credit reports, update loan information and search for a loan online. Already, 95 percent of InterFirst's active customers use Internet-based MOAI to conduct business with the company. In July, 76 percent of loans funded were through MOAI.

Christopher Boccard, president of Lafayette, California-based CB Management Services Inc., calls ABN AMRO his company's favorite lender because it, "in its infinite wisdom, realized the mortgage lending industry was changing due to technology. ABN AMRO does things [such as networking, allowing brokers to pull their own documents and request funds online] that most other lenders do not do."

CB Financial Services is a small mortgage brokerage with six loan agents and two full-time processors. Boccard began working with InterFirst when it was part of the old, independent Standard Federal.

"We work with other big banks, but no other lender streamlines the process like ABN AMRO," says Boccard. "On any given day you might find a lender in the next town over or in the San Francisco Bay area that has a very aggressive price, but you cannot underwrite that file over the Internet as you can with ABN AMRO. [ABN AMRO] listened to the needs of the brokers."

Welcome to the Sunshine State

What also helped InterFirst's wholesale business was AAMG's expansion to Sunrise, Florida, where it moved its National Lending Center, a retention and e-commerce lending operation.

Frankly, AAMG didn't have the capacity to do a good job retaining customers or even providing quality customer service, says Ron Ciolek, senior vice president and head of the National Lending Center. Previous to the move to Sunrise, Ciolek says, "Our best month ever was in June 1999, when we closed 550 units. Our best month down in Florida was June 2001, when we closed almost 2,500 units."

One of the reasons for the big change was the National Lending Center very quickly picked up an experienced work force and 72,000 square feet of already outfitted technology space. All of that came as a bonus to AAMG in addition to acquiring the mortgage.com URL.

When AAMG was approached about buying mortgage.com Inc., the thought back at the corporate headquarters in Ann Arbor was, "How the heck do you buy a company that has significant negative net worth?" Newman says.

Fortunately, the opportunity to cherry-pick some of the best components of the failed dot-com arrived at the right time. AAMG had already established its National Lending Center, also in Ann Arbor. It just wasn't getting the bodies it needed. "We were recruiting here, but since Washtenaw County [where Ann Arbor is located] has the lowest unemployment rate in the state, we ended up stealing mostly from InterFirst," says Ciolek.

While mulling over the mortgage.com opportunity, some AAMG executives went down to Sunrise to see what the deal was all about. What they found was mortgage.com's old headquarters, 72,000 square feet of technology-laden space built for a mortgage operation, plus a work force that was soon to be out of a job.

Mortgage.com had already terminated its lease, so AAMG grabbed the entire 72,ooo-square-foot space that was available. It did the same with the existing structure and technology. "We told them to leave everything on the desks, and we leased it all right down to the cubicles," Newman says. AAMG made the announcement that it would be moving the National Lending Center to the former mortgage.com headquarters on December 8, and by January 4, the National Lending Center in Sunrise was open for business.

It was in early December that the existing National Lending Center staff fought through a deep snowstorm to come to work and hear the announcement of its business being relocated. AAMG offered to relocate anyone who wanted to go to Florida. It was still snowing when three times the expected number of relocations moved south. The recruits were added to the former mortgage.com staff members, who also thought themselves very lucky going from unemployment to employment in the blink of an eye.

In Ann Arbor, the National Lending Center ran with 55 to 6o people. In Florida, the permanent staff now totals 155, of which about ioo are former mortgage.com employees, plus another 40 to 45 temporary workers.

Of course, the original look-see in Florida was due to the mortgage.com name being up for sale, and ABN AMRO decided the URL was worth buying. "If you want to be in the online mortgage business, mortgage.com is a pretty good URL," says Newman. "At ABN AMRO, we have our challenges because we are not a national brand. We wanted something we could leverage. Now, we actually front a lot of our consumer-direct stuff with `mortgage.com by ABN AMRO Mortgage,' so we get a lot of collateral benefits."

Newman won't say what AAMG paid for the URL, but the acquisition fit perfectly with the company's needs. "The way to look at e-commerce is that it is one of the many challenges of the business," says Newman. "We are not overly dependent on it, but it is going to grow rapidly so you want to be a player."

The name game

There's nothing tricky about the current mortgage.com site, which promotes AAMG mortgages. There is a small disclaimer note at the top of the page which reads, "ABN AMRO Mortgage is part of the ABN AMRO Mortgage Group Inc., the nation's sixth-largest mortgage lender. Apply online today and experience our competitive advantage." That's the leverage the site can offer in expanding the ABN AMRO name.

"Mortgage.com is a good name," reiterates Rhodes. "ABN AMRO is not a household name. We need to brand that name, and it is easier to get people to come to mortgage.com. The site gets a lot of visitors."

The e-commerce venture is only part of the ABN AMRO branding paradox. There are the other subsidiaries in wholesale and retail that still carry their traditional names. "This is a constant debate in North America, if not globally for ABN AMRO," Rhodes says. "I think it will change someday, but you don't want North America to go off unilaterally and imprint a new name."

On a marketing level, all new printed material-including brochures and statements-will include the ABN AMRO Mortgage name, plus a list of all the subsidiaries. "Up until a few months ago, customers were receiving individualized statements-a Standard Federal statement or a LaSalle statement," says Crenshaw. "Now we are trying to build this umbrella. Our challenge in the marketing department is to try and bring it all together, and that's where our efforts are being focused."

The difficulty is that ABN AMRO Mortgage is the only one of ABN AMRO N.V's North American operations that operates on a national basis in the United States. Standard Federal and LaSalle Bank are regional units with names recognized only in those particular geographic areas. Rhodes would prefer his companies to operate under one name, but he recognizes there are valid reasons to do otherwise. If the company expands as it is doing in Minnesota, then those new units are carrying the ABN AMRO Mortgage name. "Someday there will be consistency," Rhodes says.

Moving in different directions

The operations in Minnesota were de novo, in that they were started from scratch. Obviously, the other option for ABN AMRO is to buy existing businesses. "We are constantly looking at acquisitions," says Rhodes, "but they have to make sense and we have specific equity standards. My minimum return on equity is 22 percent, so when you start looking at acquisitions you have to be cautious."

The fact of the matter is, ABN AMRO has not done a lot of acquisitions. It looked hard at the residential mortgage banking business of PNC Financial Services Group Inc., which had been on the market-it just did not look at it hard enough. PNC's residential mortgage ended up with Washington Mutual, Seattle. Before Michigan National, the last purchase of any size was Atlantic Mortgage Investment Corporation, Jacksonville, Florida. Acquired from Pitney Bowes, Atlantic Mortgage boasted an si8 billion servicing platform of mostly low-- balance loans, and, as Rhodes notes they were "with higherthan-normal delinquency." In terms of servicing, AAMG now runs a $125 billion portfolio as of June 2001.

All this does not mean ABN AMRO has become overly cautious. One of its most successful new ventures has been the creation of ABN AMRO Mortgage Capital Markets Group.

About four years ago, AAMG began offering 15- and 30-- year jumbo, fixed-rate mortgages, which it then securitized through ABN AMRO Capital Markets. The company so far has done six jumbo, fixed-rate loan securitizations for a total of $1.8 billion. (This does not include nonconforming product originated by InterFirst. In nonconforming product, AAMG has so far originated about $3 billion in total volume.)

"AAMG Capital Markets was started in 2000 to take the products originated by various mortgage entities of AAMG and deliver them directly to investors through customized solutions," explains Maria Fregosi, a managing director of AAMG Capital Markets. "So starting last year, we sold product directly to investors without going through securitization [as unsecuritized, whole loans]."

These types of loans are nonagency products, which AAMG tries to match to a specific type of liability. For example, Fregosi says, "We have customers in California that only want California product. Typically, our customers are banks, mutual funds and hedge funds. They are buying jumbo fixed-income, jumbo adjustable-rate mortgages (ARMs), hybrid ARMs, and we have some clients that buy Community Reinvestment Act [CRA] compliance product." (In 2000, AAMG underwrote about $300 million in CRA loans.)

How successful has AAMG Capital Markets become? Of the $7 billion of ABN AMRO mortgage loans sold in June, about 15 percent went through AAMG Capital Markets. "We are still getting to know our customers and they us," says Fregosi. "I'm encouraged, because we are already getting a lot of repeat customers."

AAMG Capital Markets was an expansion that fit well within Rhodes' objectives for his company. "My job is to grow the business within the confines of what the environment provides for us," he says, "and to do it in a profitable and safe manner." MB