Wells Fargo & Co. Chief Executive Officer Charles Scharf listens during a hearing of the House Financial Services Committee in Washington, DC, Tuesday, March 10, 2020.
Andreas Harrer | Bloomberg | Getty Images
Wells Fargo withdraws from the multi-trillion dollar US mortgage market in the face of 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 offer home loans only to existing banking and wealth management customers and borrowers in minority communities, CNBC has learned.
The twin factors of a credit market that has collapsed since the Federal Reserve began raising interest rates last year and increased oversight by regulators — both industry-wide and specifically for Wells Fargo after the 2016 fake account scandal — have resulted on that decision, consumer credit chief Kleber Santos said.
“We are very aware of the history of Wells Fargo since 2016 and the work we must do to restore public confidence,” Santos said in a phone interview. “As part of this review, we have determined that our home loan business is overly large, both in terms of overall size and scale.”
It’s the latest and perhaps most significant strategic shift CEO Charlie Scharf has made since joining Wells Fargo in late 2019. Mortgages are by far the largest category of debt held by Americans, accounting for 71% of the total $16.5 trillion in household balances. Among Scharf’s predecessors, Wells Fargo prided itself on its large share of home loans — it was the nation’s top lender as recently as 2019, according to industry newsletter Inside Mortgage Finance.
More like rivals
As a result of these and other changes Scharf is making, including seeking more revenue from investment banking and credit cards, Wells Fargo will become more like its megabank rivals Bank of America and JPMorgan Chase. Both companies relinquished mortgage interests after the 2008 financial crisis.
Following these once-great mortgage lenders and streamlining their businesses is having an impact on the US mortgage market.
When banks withdrew from home loans after the housing bubble catastrophe in early 2000, including non-bank players rocket mortgage quickly filled the gap. But these newer players aren’t as tightly regulated as banks, and industry critics say consumers could face pitfalls. Today, Wells Fargo is the third largest mortgage lender after Rocket and United Wholesale Mortgage.
Third-party loans, servicing
As part of its cut, Wells Fargo is also closing its correspondent business, which sells mortgages through third-party companies, and is “significantly” downsizing its mortgage services portfolio through asset sales, Santos said.
The correspondent channel is a significant business pipeline for San Francisco-based Wells Fargo, one that grew as overall lending activity shrank over the past year. In October, the bank said 42% of its $21.5 billion in loans originated in the third quarter were correspondent loans.
Selling mortgage service rights to other industry players will take at least several quarters depending on market conditions, Santos said. Wells Fargo is the largest U.S. mortgage lender focused on collecting payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, in the third quarter, according to data from Inside Mortgage Finance.
Overall, the postponement will result in a new round of layoffs at the bank’s mortgage business, executives acknowledged but declined to put a precise figure on how many. Thousands of mortgage workers were laid off or left the company voluntarily last year as business declined.
The news shouldn’t come as a complete surprise to investors or employees. Wells Fargo employees have speculated about changes for months after Scharf cabled his intentions several times over the past year. Bloomberg reported in August that the bank was considering reducing or ceasing lending.
“It’s very different running a mortgage business within a bank today than it was 15 years ago,” Scharf told analysts in June. “We’re not going to be as big in the industry as we were historically,” he added.
Wells Fargo said it is investing $100 million toward its goal of creating minority homeownership and placing more mortgage advisors in branches in minority communities.
“Our priority is to de-risk the place, focus on serving our own customers and playing the role that society expects of us when it comes to the racial homeownership gap,” Santos said.
The shift in mortgage lending may be the latest major business change Scharf will make after Scharf split the bank’s operations into five divisions, hired 12 new operations committee members and created a diversity segment.
In a telephone interview, Scharf said he does not expect any further major changes, with the caveat that the bank will have to adapt to changing conditions.
“Given the quality of the big five companies across the franchise, we believe we have the ability to compete and win with the very best out there, whether they’re banked, non-banked or fintech,” he said.