Wells Fargo & Co. (WFC), the biggest U.S. home lender, may earn higher profits in the U.S. mortgage market as rivals flee from angry homeowners, more powerful regulators and billions of dollars in losses.
Wells Fargo originated $89 billion of mortgages in the third quarter, more than the combined total of JPMorgan Chase & Co. (JPM)’s $37 billion and Bank of America Corp. (BAC)’s $33 billion, according to company statements. Bank of America plans to close a mortgage unit that contributed more than 50 percent of its new mortgages in the second quarter.
“When you think about being able to grow our mortgage business today, it’s a huge opportunity for us,” Wells Fargo Chief Financial Officer Timothy J. Sloan, 51, said in an Oct. 17 interview. “It’s more difficult for some of our competitors, without being specific, than it is for us because they weren’t as disciplined as we were. We weren’t perfect but we were disciplined.”
Wells Fargo may pick up market share and generate bigger profits as competitors cut operations or leave the market altogether. The housing crisis forced more than 100 mortgage lenders to close or seek buyers since the start of 2007. Now mortgage-market reforms are raising the regulatory burden and making it difficult for smaller firms to compete, said Glen Corso, managing director of the Community Mortgage Banking Project, a coalition of smaller independent lenders.
Wells Fargo Chief Executive Officer John G. Stumpf said this week that his company now originates one of every four U.S. mortgages, a position held by Bank of America as recently as 2007. The figure is even higher for refinancing, Stumpf said.
“Wells is finding that they can expand their share of the market without necessarily tightening their margins,” Corso said. “They can almost have their cake and eat it too.”
Bank of America’s 2008 purchase of subprime lender Countrywide Financial Corp. helped trigger writedowns that contributed to six quarterly losses since mid-2008 at the Charlotte, North Carolina-based bank. The firm has reported about $40 billion in expenses since 2007 tied to faulty mortgages and foreclosures, the most among its peers, according to data compiled by Bloomberg.
In an effort to put the losses behind the company and bolster a flagging share price, CEO Brian T. Moynihan, 52, is selling assets and exiting certain businesses. The lender said this month that it would shutter its correspondent lending division, which buys mortgages marketed by third-party lenders. Cutting the unit, which reports to home loans chief Barbara Desoer, contributed to a decline in third-quarter production, the bank said Oct. 18.
Wells Fargo Benefits
The retreat already has boosted results at San Francisco- based Wells Fargo, whose mortgage business is run by Mike Heid. The company said the correspondent and wholesale channel originated $45 billion of mortgages in the third-quarter, up 55 percent from $29 billion in the prior three-month period.
Correspondent originations accounted for $21.8 billion, or 54 percent, of Bank of America’s mortgage lending in the second quarter, the lender said in August. It didn’t disclose third- quarter data.
Other competitors also are retrenching. JPMorgan’s correspondent business may be one-third of its size in a couple of years, CEO Jamie Dimon, 55, said on the company’s Oct. 13 conference call.
MetLife Inc., which already is selling banking assets to avoid regulatory oversight, may seek a buyer for its mortgage operation. Keeping the unit could divert “resources away from MetLife’s primary focus on its global insurance and employee benefits businesses,” the New York-based company said in an Oct. 12 statement.
“The regulatory burden they needed to undertake to stay in the mortgage market didn’t seem to make sense,” Corso said. “While the mortgage market is a challenging place to do business and the regulatory burdens are causing some people to leave the market, it’s creating opportunities.”
Wells Fargo, in an effort to get out in front of regulatory reforms, has sought a leading role. Last year, in a Nov. 16 letter to regulators, the bank argued against banking-industry efforts to exempt most new mortgages from a Dodd-Frank Act provision requiring loan originators to keep a stake in debt they sell or securitize. Only mortgages with a down payment of at least 30 percent should be exempt, Wells Fargo said.
“They have a certain view and it’s because they think it helps them versus others,” said Thomas Lawler, a former Fannie Mae economist who is president of Lawler Economic & Housing Consulting, a real-estate research firm in Leesburg, Virginia.
Who’s on Top
Since at least 2006, Wells Fargo or Bank of America and Countrywide have led the mortgage market. Wells Fargo originated $1.16 trillion in home loans from 2006 through 2008 while Bank of America or Countrywide originated $1.54 trillion, according to Inside Mortgage Finance, an industry publication.
In the two full years that followed, Wells Fargo originated $819.7 billion while Bank of America issued $697.8 billion.
With the decline in the size of the market, Bank of America doesn’t need the large-scale origination platform it acquired from Countrywide, CFO Bruce Thompson said on an Oct. 18 conference call.
Wells Fargo also is overtaking Bank of America in mortgage servicing, the business of managing bills, collections and foreclosures. Those tasks became more costly after defaults and evictions rose to record levels, spurring accusations from homeowners and attorneys general that some servicers relied on legal shortcuts and fraudulent documents to speed the process.
On top of that, new international regulations require lenders to hold more capital against mortgage-servicing rights to cushion the risks. That’s spurring Bank of America, which has promised to reach the new targets on time, to sell rights on 150,000 loans to ease the demand for capital, and the company said more sales are likely.
“A lot has changed in the mortgage business really starting in 2008,” Stumpf, 58, said during Wells Fargo’s earnings conference call this week. Some of the excesses that prevailed during the housing bubble before 2008 have been eliminated, and “low-doc and liar-loans and stated income is all history.” Liar loans is industry slang for mortgages made to borrowers who inflated their incomes on applications that weren’t verified by lenders.
Competitors Won’t Leave
The lack of competitors may mean Wells Fargo can charge more for mortgages since consumers won’t be able to shop around, Lawler said. It can then earn larger profits when it sells those mortgages to Fannie Mae and Freddie Mac, the two biggest suppliers of financing for home loans, he said.
“When you look at where some large lenders are posting their rates versus the secondary-market yields at which they can sell the mortgage to Fannie and Freddie, there is an awful lot of profit embedded there,” Lawlor said. “The posted rates seem to have a massively higher profit margin for originating the loan than what used to be the case.”
Wells Fargo reported $803 million in net gains on mortgage loan originations and sales, up from $742 million in the second quarter, and down 60 percent from last year’s third quarter when the company reported $1.98 billion on $101 billion in originations.
Still, Wells Fargo won’t have the market to itself. The average rate on a typical 30-year mortgage fell to a record 3.94 percent earlier this month, according to Freddie Mac. That’s driving demand for mortgages and convincing other firms that it’s worth staying in the market.
“It would be a mistake to say, ‘Okay, we’re going to get out of it because of legacy problems,’” JPMorgan’s Dimon said. “Believe me, there’s the temptation. It’s still the most important financial product for the majority of Americans and it will be for the rest of our lives.”