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Wells Fargo Sees Home Equity as ‘Top Concern,’ Analyst Says

Wells Fargo & Co. Chief Executive Officer John Stumpf
Wells Fargo & Co. Chief Executive Officer John Stumpf. Photographer: Brendan Smialowski/Bloomberg

Wells Fargo & Co. Chief Executive Officer John Stumpf said home-equity losses remain his “top concern” because unemployment in the U.S. is still high, according to Sanford C. Bernstein & Co.

“Stumpf noted that home-equity losses remain his number one concern, which makes sense to us given Wells has the largest portion of its loan book allocated to mortgages and home-equity loans among large banks,” analyst John McDonald wrote in a note yesterday. He has an “outperform” rating on the bank, the biggest home lender in the U.S.

McDonald wrote the report after meeting with Stumpf, finance chief Timothy J. Sloan and other executives in San Francisco, where the bank is based. Analysts including Laurie Goodman of Amherst Securities Group LP have said lenders including Wells Fargo are jeopardizing the housing market’s recovery by not recognizing impairments on home-equity holdings.

Wells Fargo held $117.5 billion of home-equity loans at the end of December, with $42.8 billion of those made in California and Florida, according to the bank’s year-end filing. Almost $110.6 billion of the loans was held in a so-called core portfolio. The unemployment rate in the bank’s mortgage footprint is a percentage point higher than the national average of 8.9 percent, McDonald wrote.

“Management was clear that it views the outlook for home-equity and mortgage losses to be more tied to employment conditions than home prices,” McDonald wrote.

Potential Loss

Home-equity loans typically are granted on top of a primary mortgage, which has first claim on payments or the property itself in case of default. If that happens and the value of the home has dropped, the bank holding the home-equity loan can suffer a total loss.

Purchases of new U.S. homes unexpectedly declined in February to the slowest pace on record and prices dropped 8.9 percent annually to the lowest level since December 2003, the Commerce Department said yesterday. Jes Staley, head of investment banking at JPMorgan Chase & Co., told visiting analysts that risks tied to U.S. home mortgages deserve as much concern as risks facing the European Union, according to Nomura Holdings Inc.

JPMorgan held $88.4 billion of home-equity loans at the end of December while Bank of America Corp. owned $125.4 billion, according to the companies’ annual filings. The numbers for all three banks exclude acquired loans marked at fair value at the time of purchase.

Still, only about three of every 100 customers with a Wells Fargo home-equity loan are more than two payments past due, wrote Stumpf, 57, in his annual letter to shareholders.

Wells Fargo executives reiterated their belief that the bank can achieve a 1.5 percent return on assets “over time,” McDonald wrote.

Wells Fargo rose 9 cents to $31.54 at 4 p.m. in New York Stock Exchange trading. It has gained 1.8 percent this year, making it the fourth-best performer in the 24-company KBW Bank Index.

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