Wells Fargo is pulling out of the multi-trillion dollar US mortgage market due to regulatory pressure and the impact of higher interest rates.
Instead of its previous goal of reaching as many Americans as possible, the company will now focus on home loans for existing bank and asset management clients and borrowers in minority communities, CNBC has learned.
The twin factors of a loan market that has collapsed since the Federal Reserve began raising rates last year and questions about the long-term profitability of the business led to the decision, said head of consumer lending Kleber Santos. Regulators have stepped up oversight of mortgage lending in the past decade, with Wells Fargo drawing extra attention after a 2016 fraudulent account scandal.
“We are sincerely aware of Wells Fargo’s history since 2016 and the work we have to do to restore public confidence,” Santos said in a phone interview. “As part of that review, we determined that our residential lending business was too large, both in terms of overall size and scope.”
It’s the latest, and perhaps most significant, strategic move CEO Charlie Scharf has taken 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 massive share of home loans — it was the nation’s largest lender by 2019, when it had $201.8 billion in volume, according to industry newsletter Inside Mortgage Finance.
More like rivals
Now, as a result of this and other changes Scharf is implementing, including pushing for more income from investment banking and credit cards, Wells Fargo will look more like its megabank rivals Bank of America and JPMorgan Chase. Both companies divested their mortgage stake after the 2008 financial crisis.
The downsizing of these once huge operations has implications for the US mortgage market.
As banks backed away from home loans after the housing bubble disaster of the early 2000s, non-bank players, including Rocket mortgage quickly filled the void. But these newer players are not as tightly regulated as banks, and industry critics say that could expose consumers to pitfalls. Today, Wells Fargo is the third largest mortgage lender after Rocket and United Wholesale Mortgage.
Other people’s loans, servicing
As part of its job cuts, Wells Fargo is also closing its correspondent business, which buys loans from third-party lenders, and is “significantly” reducing its mortgage servicing portfolio through asset sales, Santos said.
The letter channel is a significant line of business for San Francisco-based Wells Fargo, which grew larger as overall lending activity declined last year. In October, the bank said 42% of the $21.5 billion in loans it originated in the third quarter were correspondent loans.
Selling mortgage servicing rights to other industry players will take at least a few quarters, depending on market conditions, Santos said. Wells Fargo is the largest U.S. mortgage servicer, which includes the collection of payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, in the third quarter, according to Inside Mortgage Finance.
Overall, the change will result in another round of layoffs for the bank’s mortgage operations, executives acknowledged, but declined to quantify exactly how many jobs would be lost. Thousands of mortgage workers were laid off or left voluntarily last year as business slumped.
The news shouldn’t come as a complete surprise to investors or employees. Wells Fargo staff have speculated for months about the coming changes after Scharf telegraphed his intentions several times last year. Bloomberg reported in August that the bank was considering reducing or suspending correspondent lending.
“Running a mortgage business within a bank today is very different than it was 15 years ago,” Scharf told analysts in June. “We’re not going to be as big as we’ve historically been” in the industry, he added.
Wells Fargo said it is investing $100 million in its goal of minority home ownership and placing more mortgage consultants in branches located in minority communities.
“Our priority is to de-risk the site, focus on serving our own customers, and play the role that society expects us to play on the racial ownership gap,” Santos said.
The mortgage switch marks potentially the last major business overhaul Scharf will undertake after splitting the bank’s operations into five divisions, bringing in 12 new operating committee members and creating a diversity segment.
In a phone interview, Scharf said he doesn’t foresee other major changes, noting that the bank will have to adapt to changing conditions.
“Given the quality of the big five firms across the franchise, we think we’re in a position to compete with the best and win, whether it’s banks, non-banks or fintechs,” he said.