Wells Fargo eyes ‘significantly smaller’ mortgage origination market as it weighs the size of its business

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Wells Fargo & Co. said it was weighing the size of its mortgage business in the face of a “significantly smaller mount market” as homebuyers pull back from higher interest rates and lending capital shrinks. rarefy.

A bank spokesperson said in an email to MarketWatch that Wells Fargo is pricing its mortgage unit “like others in the industry” as part of an ongoing effort to “prioritize and position us as best we can.” to serve our customers at large”.

The move comes as job cuts continue to impact the mortgage industry, including a reduction of 1,000 people at JPMorgan Chase & Co. JPM,
+1.09%.

Read also : Layoffs nibble at mortgage sector as lenders absorb slowdown in housing finance

The Mortgage Bankers Association recently reported that its composite market index fell to its lowest level since February 2000 amid weak refinances and purchases tied to higher interest rates.

Banking analyst Richard Bove of Odeon said Wells Fargo’s move comes as no surprise as it has already reduced its mortgage business over the past seven years.

The bank’s market share fell to 1.92% in 2022 from 2.73% in 2015, according to Federal Reserve figures compiled by Odeon.

Bove also said the entire mortgage business faces a potential funding slump as the U.S. Federal Reserve steps up efforts to shrink its balance sheet, including mortgage debt.

Read also : Liquidity disappears in this central corner of the US housing finance market as the Fed pulls back

For its part, Wells Fargo clearly signaled a slowdown in mortgage activity during its second-quarter analyst call on July 15.

“If you just look at where we originated historically versus where we originated today, that will naturally decline over time,” CEO Charles Scharf said. “We’re not interested in being extraordinarily big in the mortgage business just for the sake of being in the mortgage business. We are in the home loan business because we believe that the home loan is an important product that we need to tell our customers about, and that will ultimately determine the appropriate size of it.

Real estate lending revenue fell 53% in Wells Fargo’s second quarter from year-ago levels, due to lower mortgages and squeezed margins in the face of higher interest rates and tighter conditions. continued competitive pricing in response to excess capacity in the industry, the bank said. Mortgage originations in the second quarter fell 10% from the first quarter.

“We are making adjustments to reduce expenses in response to lower origination volumes, and we expect these adjustments to continue over the next two quarters,” Wells Fargo Chief Financial Officer Michael Santomassimo said during an interview. of the call.

Bloomberg initially announced Wells Fargo’s plans on Monday to wind down its mortgage business.

Separately, Deutsche Bank analyst Matt O’Connor reiterated a buy rating on Wells Fargo on Monday and said the bank offered “a better capital position than its peers, a cost-cutting program , leverage in the face of rising interest rates…and an attractive valuation.”

The bank will potentially see its asset cap removed in the spring of 2023, he said.

Wells Fargo currently has a $1.95 trillion cap on its assets that has been in place since 2018 following controversy over its fake accounts, as reported by the US Consumer Financial Protection Bureau.

Wells Fargo shares are down 3.8% in 2022, compared to an 8.1% decline for the Financial Select SPDR Fund XLF,
+1.03%
and a 9.6% loss in the S&P 500 SPX,
+0.43%.

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