Charles Scharf, chief executive of Wells Fargo & Co., listens during a House Financial Services Committee hearing in Washington, DC, U.S., Tuesday, March 10, 2020.
Andre Harrer | Bloomberg | Getty Images
Wells Fargo is pulling out of the multi-trillion dollar market for US mortgages amid regulatory pressure and the impact of rising interest rates.
Instead of its previous goal of reaching as many Americans as possible, the company will now only offer home loans to existing banking and wealth management customers and borrowers in minority communities, CNBC has learned.
The dual factor of a lending market that has collapsed since the Federal Reserve began raising rates last year and increased regulatory scrutiny — both industry-wide and country-specific. Wells Fargo after its fake accounts scandal in 2016 – led to the decision, said consumer loans chief Kleber Santos. .
“We are acutely 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 this review, we determined that our mortgage lending business was too large, both in terms of overall size and scope.”
This is the most recent, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken 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 in total household balances. . Under Scharf’s predecessors, Wells Fargo prided itself on its large share of home loans — 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 that and other changes Scharf has made, including the push for more investment banking and credit card revenue, Wells Fargo will more closely resemble its megabank rivals. Bank of America and JPMorgan Chase. Both companies sold mortgage shares after the 2008 financial crisis.
Following these once-huge mortgage players in shrinking operations has implications for the US mortgage market.
As banks withdrew from home lending 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 tightly regulated as banks, and industry critics say this could expose consumers to pitfalls. Today, Wells Fargo is the third largest mortgage lender after Rocket and United Wholesale Mortgage.
Third-party loans, management
As part of its pullback, Wells Fargo is also shutting down its mail-order business that sells mortgages through third-party companies and “significantly” shrinking its mortgage servicing portfolio through asset sales, Santos said.
The correspondence channel is an important business pipeline for San Francisco-based Wells Fargo, which has expanded as overall lending activity has declined over the past year. In October, the bank said 42% of the $21.5 billion in loans it issued in the third quarter were mail-order loans.
Selling the mortgage servicing rights to other industry players will take at least several quarters, depending on market conditions, Santos said. Wells Fargo is the largest US mortgage service, which collects 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. .
In total, the change will lead to another round of layoffs for the bank’s mortgage operations, executives acknowledged, but declined to quantify exactly how many. Thousands of mortgage workers were laid off or voluntarily left the company last year as business declined.
The news shouldn’t come as a complete surprise to investors or employees. Wells Fargo employees have speculated for months about the upcoming changes 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 within a bank than it was 15 years ago,” Scharf told analysts in June. “We won’t be as big as we historically were” in the industry, he added.
Wells Fargo said it is investing $100 million in its goal of minority homeownership and placing more mortgage advisers in branches located in minority communities.
“Our priority is to reduce the risks of the place, to focus on serving our own customers and to play the role that society expects of us in relation to the racial homeownership gap”, Santos said.
The mortgage change marks what is potentially the last major business shift Scharf will undertake after splitting the bank’s operations into five divisions, recruiting 12 new operating committee members and creating a diversity segment.
In a phone interview, Scharf said he does not anticipate any other major changes, with the caveat that the bank will have to adapt to changing conditions.
“Given the quality of the top five companies in the franchise, we believe we are well positioned to compete with the best and win, whether they are banks, non-banks or fintechs,” he said. -he declares.