Wells Fargo & Co. confirmed Tuesday it is shrinking the size of its home-lending serving business as part of retrenching what had been the nation’s largest mortgage provider.
Bloomberg News reported in an Aug. 14 article that Wells Fargo was pulling back from providing funds for mortgage loans made by third-party lenders, as well as serving Federal Housing Administration loans.
Wells Fargo chief executive Charlie Scharf told analysts during the Jan. 13 fourth-quarter earnings call that "we do not need to be one of the biggest (mortgage) originators or servicers in the industry to do this effectively."
"Across all of our businesses, we must evolve as the market regulation and competition has evolved."
Although Scharf acknowledged that the pullback "may seem counterintuitive, we believe the decision to reduce risk in the mortgage businesses by reducing size and narrowing our focus actually will enable us to serve customers better and will also improve our returns in the long run."
People are also reading…
The downsizing involves exiting what is known as the correspondent business.
Rocket Mortgage defines correspondent lending as when a lender originates and funds a mortgage, but then sells it typically to Fannie Mae, Freddie Mac, FHA or federal Veterans Administration. Those agencies typically package the mortgages and sell to investors as mortgage-back securities.
“Mortgage is an important relationship product, and our goal is to continue to be the primary mortgage lender to Wells Fargo bank customers, as well as minority homebuyers,” said Kleber Santos, chief executive of the bank’s consumer lending division.
“We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus.”
Brian Nyitray, an analyst with The Motley Fool, said that "overall, Wells Fargo's exit from the correspondent business will leave the company to pursue more profitable activities."
"Correspondent lending is a notoriously low-margin business, and it will also reduce the company's regulatory risk, at least somewhat."
In December, the federal Consumer Financial Protection Bureau said it is requiring Wells Fargo to pay $1.7 billion in fines and more than $2 billion in redress and compensation to customers.
The CFPB said the fines and penalties “represent refunds of wrongful fees and other charges and compensation for a variety of harms, such as frozen bank accounts, illegally repossessed vehicles and wrongfully foreclosed homes.”
Included in the fines was nearly $200 million in consumer redress for affected mortgage servicing accounts.
The CFPB said that under the order, “Wells Fargo either has developed, or must develop, remediation plans for each of the specified acts and practices addressed in the order. The bureau will be supervising Wells Fargo’s administration of redress.”
“It’s a move certainly designed to gain some good public relations,” said Bowman Gray IV, a local independent stockbroker.
“Given that the real estate market, and subsequently the mortgage business, are slowing on their own, this was an easy move to make.
“Of course, a reduced debt portfolio will have an impact on future stress tests to their favor as well,” Gray said.
Shrinking market share
According to Bankrate.com, of the top-10 U.S. mortgage lenders for 2021, only Wells Fargo (fourth) and JPMorgan Chase & Co. (sixth) were traditional banks.
The rest were online mortgage specialists, such as No. 1 Rocket Mortgage (formerly known as Quicken Loans), or independent mortgage brokers, such as No. 2 United Shore Financial and No. 5 Freedom Mortgage.
Wells Fargo had as recently as 2012 a 33% mortgage lending market share as the top lender.
Wells Fargo chief executive Charlie Scharf told analysts during the bank’s second-quarter earnings call on July 15 that the bank has shifted its focus on mortgage lending. Wells Fargo will release its fourth-quarter report Friday.
“If you just go back and look at how big we were in the mortgage business, we were a hell of a lot bigger than we are today,” Scharf said.
For the third quarter, mortgage banking fees were $324 million, up 13% from the second quarter, but down 74% from a year ago.
“So, we have been all along just reassessing what makes sense for us to do, how big we want to be both in the context of what our focus should be in terms of our primary focus should be on service — serving our own customer base,” Scharf said on July 15.
Scharf said customer demand will “dictate the appropriate size” of its residential mortgage lending going forward.
“When you look at how much we’re originating versus the size of our servicing business, the servicing business over time will become smaller. I think that’s a smart and good thing for us for many reasons.
“We’re going to focus on products that make sense for us in the context of where we can make money over the cycles, given all of the complexities and all the requirements that banks have that not necessarily everyone else have and make sure we’re getting the right returns for it.”
Other changes announced Tuesday include spending $100 million “to advance racial equity in homeownership, including strategic partnerships with non-profit organizations and community-focused engagements. It plans to work with the National Urban League, UnidosUS and other non-profit organizations in the effort.
The bank said it also will expand the number of home mortgage consultants in minority communities.
More than ebb and flow
There’s always been a natural ebb and flow to residential mortgage lending, based largely on the rise and fall of interest rates and the supply and demand of new and existing housing.
Riding on that ebb and flow can be tens of thousands of bank jobs tied to mortgage originations and refinancing.
That workforce tends to surge when interest rates are low and housing inventory is plentiful, and experience sharp job cuts when rising interest rates and tight inventory supplies discourage buying and refinancing.
Analysts say Wells Fargo and other national and super-regional banks have lost market share to online financial institutions, such as Rocket Mortgage, United Shore Financial and Loan Depot.
Wells Fargo trailed those lenders in loans originations during 2021, according to Bankrate.com, with Rocket Mortgage at 1.2 million loans, United Shore Financial at 654,000, Loan Depot at 390,000 and Wells Fargo at 376,000.
When measuring by value of loans, Wells Fargo was third at $159 billion, JPMorgan was fifth at $134 million and Bank of America Corp. was seventh at $85 billion.
Tony Plath, a retired finance professor at UNC-Charlotte, said that “jettisoning the correspondent business isn’t a big surprise, since it’s difficult to manage borrower contact quality control when you’re dealing with independent third-party contractors.”
“Cutting the servicing business is a big surprise since this regular contact with borrowers provides some of the best legitimate relationship-building and cross-selling opportunities in the industry.”
Plath, however, is optimistic that the cyclical nature of residential mortgage lending will swing back enough to entice national and super-regional banks to stay active in the sector.
“Once we complete this latest down phase of the mortgage lending cycle, and loan rates are once again lower with housing supply more plentiful and favorably priced, all of the banks currently pulling back from the industry will jump right back in with both feet,” Plath said.
Nyitray isn't so sure that will happen with Wells Fargo.
"Wells Fargo management decided that it makes sense to reduce the bank's footprint in the mortgage business as opposed to waiting out a recovery," Nyitray said.
"The mortgage business is being squeezed by a number of factors, including sluggish home sales, rising mortgage rates and intense competition."
Nyitray said that since the start of 2022, several mortgage bankers have folded, including Sprout Mortgage and First Guaranty, while Loan Depot decided to exit the wholesale business and HomePoint sold its corresponding mortgage origination business.
"Wells Fargo has been a consistent top-five originator, so this is a big event," Nyitray said.
"Wells Fargo isn't exiting completely, however; it will devote its lending to existing banking customers and underserved areas."
Nyitray said Wells Fargo exiting the mortgage service sector may prove to be a prudent move.
"If the U.S. enters a recession in 2023, two things will happen to mortgage servicing," he said.
"First, delinquencies will increase, which means a higher cost to service these loans. Second, rates will fall as the Fed pivots toward supporting the economy, as opposed to fighting inflation."
Nyitray said that since delinquencies and mortgage rates "are inputs into the value of mortgage servicing, values have probably increased about as much as they can."
"Wells Fargo is striking while the iron is hot and will be selling toward peak valuations.
"In addition, the Consumer Financial Protection Bureau focuses like a laser on servicing, and this helps lower Wells Fargo's profile."