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Wells Fargo Rides Away from Residential Mortgage Lending

It’s news when an erstwhile number-one player in an arena steps back from the game, but it isn’t always a surprise. Wells Fargo, the leader in residential mortgage lending as recently as 2019, announced on Tuesday that it would pursue a “more focused” home lending business, targeting home loans for existing bank and wealth management customers and borrowers in minority communities. It’s also exiting the correspondent business and reducing the size of its servicing portfolio. 

“We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus,” said Kleber Santos, CEO of Consumer Lending at Wells Fargo. “As the largest bank lender to Black and Hispanic families for the last decade, we remain deeply committed to advancing racial equity in homeownership.” 

Housing Wire noted that the bank’s moves didn’t come out of the blue. “Executives have hinted at it over the past year and Bloomberg reported in August that Wells Fargo would likely shrink or eliminate the correspondent channel,” according to Housing Wire. “Bank executives reportedly expressed concerns about ‘reputational risk’ when financing large amounts of loans originated from other firms.” 

Santos told CNBC that dual factors of a lending 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. Regulators have increased their oversight of mortgage lending in the past decade, and Wells Fargo garnered further scrutiny after its 2016 fake accounts scandal, CNBC reported. 

“We are acutely aware of Wells Fargo’s history since 2016 and the work we need to do to restore public confidence,” Santos told CNBC. “As part of that review, we determined that our home-lending business was too large, both in terms of overall size and its scope.” 

Bank of America and JPMorgan Chase came to similar realizations following the 2008 financial crisis, scaling back their once-enormous residential mortgage businesses. “As banks stepped back from home loans after the disaster that was the early 2000s housing bubble, nonbank players including Rocket Mortgage quickly filled the void,” reported CNBC. “But these newer players aren’t as closely regulated as the banks are, and industry critics say that could expose consumers to pitfalls.” Wells is now the nation’s third-biggest mortgage lender after Rocket and United Wholesale Mortgage. 

Even before announcing its decision to exit correspondent lending, Wells’ correspondent portfolio was already on the decline. Between January and September 2022, Wells originated $37 billion in the space, down 27% cyear over year, reported Housing Wire. 

“A primary source of mortgage servicing rights, the correspondent channel has limitations in terms of margins because lenders must pay the network of originators that they aggregate loans from,” according to Housing Wire. “But it does have the advantage of relying on the strength of small lenders like community banks and independent mortgage banks, which typically have good relationships with local real estate agents and are often purchase-focused.” 

Last summer, investment banking firm Keefe, Bruyette & Woods (KBW) reported that Wells’ exit of the correspondent lending market could benefit other large correspondent mortgage originators, such as Pennymac Financial, Amerihome and New Rez/Caliber.  

“We estimate that around 10% of [Wells Fargo’s] service volume is Ginnie Mae/FHA [Federal Housing Administration],” the KBW report states. “The reduced role of Wells Fargo in servicing should make it easier for others to grow GSE servicing.  

“However, there are far fewer participants in Ginnie Mae servicing, so the reduced role of Wells in that market might result in weaker pricing, which in turn could mean higher borrower rates for FHA borrowers.” 

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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