Wells Fargo is stepping back from the multi-trillion dollar marketplace for U.S. mortgages amid regulatory pressure and the impact of upper rates of interest.
As an alternative of its previous goal of reaching as many Americans as possible, the corporate will now offer home loans to existing bank and wealth management customers and borrowers in minority communities, CNBC has learned.
Dual aspects of a lending market that has collapsed because the Federal Reserve began raising rates last yr and questions on the long-term profitability of the business led to the choice, said consumer lending chief Kleber Santos. Regulators have heightened oversight of mortgage lending previously decade, and Wells Fargo garnered further scrutiny after its 2016 fake accounts scandal.
“We’re conscious about Wells Fargo’s history since 2016 and the work we’d like to do to revive public confidence,” Santos said in a phone interview. “As a part of that review, we determined that our home lending business was too large, each when it comes to overall size and its scope.”
It’s the most recent, and maybe most vital, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019. Mortgages are by far the biggest category of debt held by Americans, making up 71% of the $16.5 trillion in total household balances. Under Scharf’s predecessors, Wells Fargo took pride in its vast share in home loans — it was the country’s top lender as recently as 2019, when it had $201.8 billion in volume, in keeping with industry newsletter Inside Mortgage Finance.
More like rivals
Now, consequently of this and other changes that Scharf is making, including pushing for more revenue from investment banking and bank cards, Wells Fargo will more closely resemble megabank rivals Bank of America and JPMorgan Chase. Each corporations ceded mortgage share after the 2008 financial crisis.
Following those once-huge mortgage players in slimming down their operations has implications for the U.S. mortgage market.
As banks stepped back from home loans after the disaster that was the early 2000’s housing bubble, non-bank players including Rocket Mortgage quickly filled the void. But these newer players aren’t as closely regulated because the banks are, and industry critics say that would expose consumers to pitfalls. Today, Wells Fargo is the third biggest mortgage lender after Rocket and United Wholesale Mortgage.
Third-party loans, servicing
As a part of its retrenchment, Wells Fargo can also be shuttering its correspondent business that buys loans made by third-party lenders and “significantly” shrinking its mortgage servicing portfolio through asset sales, Santos said.
The correspondence channel is a big pipeline of business for San Francisco-based Wells Fargo, one which became larger as overall loan activity shrank last yr. In October, the bank said 42% of the $21.5 billion in loans it originated within the third quarter were correspondence loans.
The sale of mortgage servicing rights to other industry players will take no less than several quarters to finish, depending on market conditions, Santos said. Wells Fargo is the largest U.S. mortgage servicer, which involves collecting payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, as of the third quarter, in keeping with data from Inside Mortgage Finance.
More layoffs
Altogether, the shift will lead to a fresh round of layoffs for the bank’s mortgage operations, executives acknowledged, but they declined to quantify exactly what number of. Hundreds of mortgage staff were terminated or voluntarily left the corporate last yr as business declined.
The news should not be an entire surprise to investors or employees. Wells Fargo employees have speculated for months about changes coming after Scharf telegraphed his intentions several times previously yr. Bloomberg reported in August that the bank was considering paring back or halting correspondent lending.
“It’s totally different today running a mortgage business inside a bank than it was 15 years ago,” Scharf told analysts in June. “We cannot be as large as we were historically” within the industry, he added.
Last changes?
Wells Fargo said it was investing $100 million towards its goal of minority homeownership and placing more mortgage consultants in branches situated in minority communities.
“Our priority is to de-risk the place, to give attention to serving our own customers and play the role that society expects us to play because it pertains to the racial homeownership gap,” Santos said.
The mortgage shift marks what’s potentially the last major business change Scharf will undertake after splitting the bank’s operations into five divisions, bringing in 12 latest operating committee members and making a diversity segment.
In a phone interview, Scharf said that he didn’t anticipate doing other major changes, with the caveat that the bank might want to adapt to changing conditions.
“Given the standard of the five major businesses across the franchise, we predict we’re positioned to compete against the easiest on the market and win, whether it’s banks, non-banks or fintechs,” he said.
