Wells Fargo & Co. (NYSE:WFC) stated that it is evaluating the size of its mortgage business in light of a dramatically reduced originations market, as home buyers flee rising interest rates and lending capital becomes scarcer.
In an email to MarketWatch, a bank spokesman stated that “Wells Fargo is evaluating its mortgage division like others in the industry as part of an ongoing effort to prioritize and best position us to serve our clients broadly.”
The decision comes as the mortgage business continues to see employment losses, including an estimated 1,000-person reduction at JPMorgan Chase & Co. (NYSE:JPM)
The Mortgage Bankers Association recently revealed that its Market Composite Index dropped to its lowest level since February 2000 as a result of a decline in refinancings and purchases due to rising interest rates.
Not a Surprise for Wells Fargo
Wells Fargo’s (NYSE:WFC) action does not come as a surprise to Richard Bove, a bank analyst at Odeon, given the bank has been reducing its mortgage business for seven years.
The bank’s market share has decreased from 2.73% in 2015 to 1.92% in 2022, according to Federal Reserve data published by Odeon.
As the U.S. Federal Reserve intensifies its attempts to decrease its balance sheet, which includes mortgage debt, according to Bove, the broader mortgage industry might experience a collapse in funding.
Wells Fargo (NYSE:WFC), for its part, signaled a slowdown in its mortgage business on its July 15 conference call with analysts for the second quarter.
“If you compare how much we originated historically to how much we originate now, it will naturally decrease with time,” stated CEO Charles Scharf. He added, “We are not interested in being exceptionally huge in the mortgage industry for the sake of being in the mortgage industry. We’re in the home loan business because we believe home loans are an important product to discuss with our consumers, and that will ultimately determine its size.”
Lower mortgage originations and compressed margins in the face of higher interest rates and continued competitive pricing in response to the industry’s excess capacity led to a 53% decline in Home Lending revenue for Wells Fargo’s second quarter compared to the same period last year, the bank reported. Originations of mortgages decreased 10% from the first quarter to the second.
Separately, Deutsche Bank analyst Matt O’Connor confirmed Wells Fargo’s buy rating on Monday, citing the bank’s superior capital position, cost-cutting program, exposure to increasing interest rates, and attractive valuation.
He stated that the bank’s asset cap could be eliminated in the spring of 2023.
In the wake of its fake accounts scandal, the U.S. Consumer Financial Protection Bureau has placed a ceiling of $1.95 trillion on Wells Fargo’s total assets, which has been in effect since 2018.
On the call, Wells Fargo (NYSE:WFC) CFO Michael Santomassimo stated, “We are making modifications to minimize expenses in response to decreased origination volumes, and we expect these adjustments to continue over the next two quarters.”
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