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Business

Wells Fargo, once the No. 1 player in mortgage lending, is backing out of the housing market




Wells Fargo & Co. CEO Charles Scharf listens during a House Financial Services Committee hearing in Washington, DC, U.S., Tuesday, March 10, 2020.

Andrew Harrer | Bloomberg | Getty Images

Wells Fargo is retreating from the multi-trillion dollar U.S. mortgage market amid regulatory pressure and the impact of higher interest rates.

Instead of its previous goal of reaching as many Americans as possible, the company will now offer mortgages to existing banking and wealth management customers and borrowers in minority communities, CNBC has learned.

The twin factors of a lending market that has collapsed since the Federal Reserve began raising interest rates last year and increased regulatory oversight — both industry-wide and specific to Wells Fargo after the 2016 fake account scandal — led to the decision, said Kleber Santos, head of consumer lending. .

“We are very aware of Wells Fargo’s history since 2016 and the work we need to do to restore public trust,” Santos said in a telephone interview. “As part of this review, we found that our mortgage 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 by far the largest category of debt held by Americans, accounting for 71% of the 16, 5 trillion dollars in total household balances. . Under Scharf’s predecessors, Wells Fargo prided itself on its large share of mortgages — it was the nation’s top lender as recently as 2019, according to industry newsletter Inside Mortgage Finance.

More like rivals

Now, as a result of this and other changes Scharf is making, including pushing for more investment banking and credit card revenue, Wells Fargo will look more like its megabank rivals Bank of America and JPMorgan Chase. Both companies issued mortgage shares after the financial crisis in 2008.

Following the once-major mortgage players in slimming down their operations has implications for the US mortgage market.

When banks withdrew from mortgage lending after the disaster that was the early 2000s housing bubble, non-bank players were included Rocket loan quickly filled the void. But these newer players are not as closely regulated as banks are, 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 the cutback, Wells Fargo is also closing its correspondent business that buys loans made by third-party lenders and shrinking “significantly” its mortgage servicing portfolio through asset sales, Santos said.

The correspondence channel is a significant pipeline of business for San Francisco-based Wells Fargo, one that grew larger as overall lending activity shrank last year. In October, the bank said 42% of the $21.5 billion in loans it originated in the third quarter were correspondent loans.

The sale of mortgage servicing rights to other industry players will take at least several quarters to complete, depending on market conditions, Santos said. Wells Fargo is the largest U.S. mortgage servicer, which involves payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, in the third quarter, according to data from Inside Mortgage Finance.

More layoffs

Altogether, the shift will result in a new round of layoffs for the bank’s mortgage business, executives acknowledged, but they declined to quantify exactly how many. Thousands of mortgage workers were laid off or voluntarily left the company last year as the business slumped.

The news shouldn’t come as a complete surprise to investors or employees. Wells Fargo employees have speculated for months about changes to come after Scharf telegraphed his intentions several times over the past year. Bloomberg reported in August that the bank was considering reducing or stopping correspondent lending.

“It’s very different today to run a mortgage business in a bank than it was 15 years ago,” Scharf told analysts in June. “We won’t be as big as we were historically” in the industry, he added.

Latest changes?

Wells Fargo said it was investing $100 million toward its minority housing goal and placing more mortgage consultants in branches in minority communities.

“Our priority is to de-risk the site, to focus on serving our own customers and playing the role that society expects us to play in terms of racial home ownership,” Santos said.

The mortgage shift marks what is potentially the last major business change Scharf will implement after splitting the bank’s operations into five divisions, bringing in 12 new operating committee members and creating a diversity segment.

In a telephone interview, Scharf said he did not expect to make other major changes, with the caveat that the bank must adapt to changing circumstances.

“Given the quality of the Big Five businesses across the franchise, we believe we are positioned to compete against the very best out there and win, be it banks, non-banks or fintechs,” he said.

Wells Fargo, once the No. 1 player in mortgage lending, is backing out of the housing market



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