Wells Fargo amid regulatory pressures and the impact of high interest rates, the US is backing away from the multi-trillion dollar market for mortgages.
Instead of reaching out to as many Americans as possible, the company will now offer home loans to existing banking and wealth management customers and borrowers in minority communities, CNBC reported.
The twin factors of a collapsed credit market after the Federal Reserve began raising rates last year and questions about the business’s long-term profitability led to the decision, said Kleber Santos, head of consumer lending. Regulators have tightened oversight of mortgage lending over the past decade, and Wells Fargo has come under increased scrutiny after the 2016 fraudulent accounts scandal.
“We are aware of Wells Fargo’s history since 2016 and the work we need to do to restore public trust,” Santos said in a phone interview. “As part of that review, we determined that our home loan business was too large, both in terms of overall size and scope.”
It’s the latest and perhaps most significant strategic shift CEO Charlie Scharf has made since joining Wells Fargo in late 2019. Mortgages are the largest category of American debt, accounting for 71% of the $16.5 trillion in total household balance sheets. . Under Scharf’s predecessors, Wells Fargo prided itself on its large share of home loans — the nation’s top lender at $201.8 billion in 2019, according to industry newsletter Inside Mortgage Finance.
More like competitors
Now, as a result of these and other changes Scharf has made, including more revenue from investment banking and credit cards, Wells Fargo will look more like its megabank rivals. Bank of America and JPMorgan Chase. Both companies gave away their share of mortgages after the 2008 financial crisis.
Following once-giant mortgage players downsizing their operations is affecting the US mortgage market.
As banks pulled back from home loans after the housing bubble disaster of the early 2000s, non-bank players including Rocket Mortgage quickly filled the void. But these new players are not as closely regulated as banks, and industry critics say that could expose consumers to pitfalls. Today, Wells Fargo is the third largest mortgage lender behind Rocket and United Wholesale Mortgage.
Third party loans, service
As part of its downsizing, Wells Fargo is also closing its correspondent business, which buys loans from third-party lenders, and is “significantly” reducing its mortgage servicing portfolio through asset sales, Santos said.
The correspondence channel is an important pipeline of business for San Francisco-based Wells Fargo, which grew last year as overall lending activity declined. In October, the bank said that 42% of the $21.5 billion in loans it issued in the third quarter were correspondent loans.
The sale of mortgage servicing rights to other industry players will take at least several quarters, depending on market conditions, Santos said. Wells Fargo is the largest U.S. mortgage servicer, collecting payments from borrowers with about $1 trillion in loans, or 7.3% of the market, in the third quarter, according to data from Inside Mortgage Finance.
Overall, the change will result in a new round of layoffs for the bank’s mortgage operations, executives acknowledged, but they declined to quantify exactly how many. Last year, thousands of mortgage workers were laid off or left the company voluntarily.
The news shouldn’t come as a complete surprise to investors or employees. Wells Fargo employees have speculated for months about the changes after Scharf telegraphed his intentions several times last year. Bloomberg reported in August that the bank was considering suspending or suspending its correspondent lending.
“Running a mortgage business at a bank today is very different than it was 15 years ago,” Scharf told analysts in June. “We’re not going to be as big as we’ve historically been” in the industry, he said.
Wells Fargo said it is investing $100 million in its minority home ownership goal and placing more mortgage advisors in branches located in minority communities.
“Our priority is to de-risk the space, focus on serving our customers, and play the role the community expects us to play in addressing the racial housing gap,” Santos said.
The mortgage shakeup marks potentially the last major business change Scharf will make after splitting the bank’s operations into five divisions, bringing in 12 new operating committee members and creating a diversity segment.
In a phone interview, Scharf said he doesn’t expect to make any other major changes, cautioning that the bank will have to adapt to changing conditions.
“Given the quality of the five main franchising businesses, whether it’s banks, non-banks or fintechs, we think we’re positioned to compete and win with the best out there,” he said.