Wells Fargo Dominates Home Lending as BofA Retreats: Mortgages

Wells Fargo Dominates Home Lending as BofA Retreats
Wells Fargo’s control raises concerns that U.S. consumers and the housing market may suffer if the bank falters. Photographer: Scott Eells/Bloomberg

Wells Fargo & Co., already the largest U.S. home lender, won the biggest market share ever recorded as competitors led by Bank of America Corp. pulled back after suffering more than $65 billion in combined mortgage losses.

Wells Fargo made 33.9 percent of the $385 billion of mortgages originated in the first quarter, up from 30.1 percent in the preceding three months, according to Inside Mortgage Finance. That’s more than triple the share of the closest competitor, JPMorgan Chase & Co., with 10.6 percent. U.S. Bancorp moved into third place from fifth, with 5.2 percent, ahead of Bank of America, with 4.2 percent.

“They pulled back while others hit the accelerator on subprime so now they are able to take advantage,” Joseph Morford, an RBC Capital Markets analyst, said of San Francisco-based Wells Fargo in a phone interview. “They’ve always been disciplined.”

The lender is dominating mortgage markets as housing shows signs of bottoming after a six-year slump and homeowners benefit from record-low borrowing costs. Wells Fargo, also the biggest home-loan servicer, posted $2.9 billion in mortgage-banking income in the first quarter, a $506 million increase from the fourth quarter. Chief Executive Officer John Stumpf, 58, has posted a profit in 13 straight quarters.

Wells Fargo’s control raises concerns that U.S. consumers and the housing market may suffer if the bank falters, said Glen Corso, a managing director of the Community Mortgage Banking Project, a coalition of smaller independent lenders.

‘Market Concentration’

“Anytime you start to have market concentration with a single company you worry about the disruption should that company stumble,” he said. “The federal government should be looking at this.”

The bank’s market share exceeded the combined total for the next seven largest lenders, Inside Mortgage Finance, an industry publication based in Bethesda, Maryland, said in an e-mail to subscribers yesterday. Wells Fargo originated $357 billion of mortgages last year, according to company statements.

The company avoided some of the mortgage missteps that afflicted rivals such as Bank of America, once the largest home lender. The Charlotte, North Carolina-based firm recorded more than $40 billion of costs tied to faulty home loans and foreclosures. Expenses have topped $72 billion at the biggest U.S. banks, including Wells Fargo, after housing slumped 35 percent from a 2006 peak.

Wasn’t Their Goal

Wells Fargo executives have said it wasn’t their goal for the company to become the largest lender. Refinancings have bolstered market share, according to Chief Financial Officer Timothy Sloan. These will account for about 62 percent of the market, or $682 billion this year, according to projections from the Mortgage Bankers Association.

“If we’re talking about the business two years ago, I don’t think we would have imagined that our market share would be where it would be today,” Sloan said during a May 1 investor conference. “We’re going to continue to be focused in the business. We’re going to continue to want to grow it.”

Sloan said the lender doesn’t expect regulators to raise concerns about its market share. While refinancings have buoyed results, so has less competition.

Bank of America, which purchased Countrywide Financial Corp. in 2008, scaled back mortgage-lending operations to reduce assets that regulators deemed risky and shifted resources to service troubled loans. Last year, CEO Brian T. Moynihan, 52, stopped reverse-mortgage lending and shuttered a business that bought loans from correspondent providers. The firm will focus on selling home loans to existing customers of the retail bank or wealth-management division, Moynihan has said.

Customers Wait

Among the targeted customers, “we underperformed, but we’re doing exactly what we wanted, which is to focus on direct-to-retail,” Moynihan told analysts last month. “You’ll see us improve there.”

Bank of America has missed out on the surge in refinancing, with its ability to handle applications crimped earlier this year. Some customers were asked to wait as many as 90 days before being serviced. Countrywide was the largest U.S. mortgage lender as recently as 2007.

Wells Fargo said mortgage originations climbed 7.5 percent in the first quarter from the preceding three months. The unclosed pipeline stood at $79 billion at the end of the quarter, up from $72 billion at year-end. Mortgage origination and sales accounted for 24 percent of all fee revenue, according to a presentation.

Loan Officer Survey

Among the large banks, “several” have reported plans to reduce their dealings in the mortgage market either “somewhat or substantially” in the next 12 months, according to the Federal Reserve’s Senior Loan Officer survey, published April 30. A “moderate” number of banks said they planned to increase their exposure, according to the Fed.

Those seeking to expand are enticed by the profits at Wells Fargo and New York-based JPMorgan, which said first quarter mortgage fees and related revenue totaled $2 billion.

Interest rates on new U.S. home loans are higher than yields on the mortgage securities, which they’re packaged into. The gap between the cost of 30-year loans and benchmark Fannie Mae yields, a measure of lenders’ profit margins called the primary-secondary spread, has widened to about 0.96 percentage point, compared with a 10-year low of negative 0.12 percentage point in June 2007, according to data compiled by Bloomberg. The spread peaked at 1.66 percentage points in December 2008.

The average rate for a 30-year mortgage fell to a record low 3.84 percent in the week ended today from 3.88 percent, according to Freddie Mac. It’s the lowest in the McLean, Virginia-based mortgage-finance company’s records dating to 1971 as the Federal Reserve buys mortgage bonds to lower borrowing costs. The average 15-year rate dropped to 3.07 percent from 3.12 percent.

‘Once in a Lifetime’

U.S. Bancorp and smaller depositories including Cole Taylor Bank are growing, as are independent companies such as Wilbur Ross’s American Home Mortgage Servicing Inc., which is shifting from just managing outstanding loans.

U.S. Bancorp, whose balance sheet is about one-seventh the size of Bank of America’s, sees an expansion in the mortgage business as a “once-in-a-lifetime” opportunity, Richard Davis, the CEO of the Minneapolis-based lender said April 17.

Home-lending revenue more than doubled in the first quarter to $452 million, from $199 million last year, Davis said.

“The small and medium guys are picking up some of the slack created by several of the larger lenders reducing their presence in the market,” Willie Newman, Cole Taylor’s head of residential-mortgage originations, said in a phone interview. Taylor Capital Group Inc., the bank’s Chicago-based parent, said last month that the lender’s originations rose 14.4 percent from the fourth quarter to $894.9 million.

Wells Fargo’s market share may be close to its peak as smaller competitors ramp up, said Paul Miller, an analyst at FBR Capital Markets and a former examiner for the Federal Reserve Bank of Philadelphia. Regulators also may pressure the bank to rein in its origination machine, he said.

“It’s going to be tough for them to grow market share from here,” Miller said. “We think the smaller players will continue to pick up share” he said, adding “the government is concerned about Wells Fargo’s concentration.”


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