Sometimes you have to take a step back before moving ahead. Wells Fargo is a case in point. America’s fourth-biggest bank by assets is pulling away from the home loans industry it once dominated by exiting the so-called “correspondent mortgage banking business”.
This area provides funding for loans arranged by outsiders. It accounted for nearly half of the bank’s loan origination in 2020. In addition, Wells Fargo is shrinking the size of its third-party servicing business, which oversees billing and collects payments on loans made by other lenders.
The withdrawal makes sense. Home lending is no longer the cash cow it once was. A sharp rise in interest rates has put the brakes on refinancing activity and sapped demand for new loans. Wells Fargo originated just $21.5bn in mortgages in the third quarter, a 59 per cent drop from the previous year. Overall, revenue from mortgage banking during the quarter fell by more than 80 per cent to $212mn.
Longer term, a pullback from home lending could also help to appease regulators. Wells has been operating under an asset cap imposed by the US Federal Reserve since 2018 following a fake accounts scandal. It has paid billions of dollars in penalties.
Most recently it agreed to pay $3.7bn to settle allegations that it mismanaged customer mortgages, car loans and bank accounts. The deal should result in a $3.5bn charge to its fourth-quarter earnings, which are due to be released on Friday.
Shares in the bank are down nearly a quarter over the past 12 months. Bar Citigroup, which has its own regulatory problems, Wells Fargo trails its Wall Street peers on every measure — from price-to-book value to return on equity. This is despite boasting a common equity tier-one capital ratio of 10.3 per cent — over 100 bps above its regulatory minimum.
Limited room to expand its balance sheet has been costly for the bank. Anything that might help to convince the Fed to lift the asset cap should be considered a plus.
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