- Wells Fargo, the third largest mortgage lender in the country, withdraws from the mortgage market.
- While they won’t be abandoning it entirely, they will focus only on providing mortgages to their existing customers and those in minority communities.
- It’s a big shift that will see Wells Fargo leapfrog competitors like Bank of America and JPMorgan Chase with a focus on investment banking and unsecured loans like credit cards.
One of the three largest mortgage lenders (and once ranked number one) in the United States, Wells Fargo, withdraws from the mortgage market. They’re not getting off the hook entirely, but they’re making drastic changes to their strategy, in one of the biggest changes we’ve seen in years.
Wells Fargo’s goal used to be to get into (and on the deed to) as many American homes as possible. Now they are looking to bring their core business closer to major competitors such as Bank of America and JPMorgan Chase, which cut their mortgage offers after the 2008 financial crisis.
It’s the latest turnaround in the changing fortunes of Wall Street, which has continued to see disruption and change after 2008. This is partly due to new regulations and corporate lessons learned from the crash, but also due to pressure from disruptors in the sector.
For homeowners and prospective homeowners, a major market exit like this is sure to have consequences. So what are they and how is this likely to affect the mortgage industry?
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What changes is Wells Fargo making?
Wells Fargo’s strategy used to focus on pure volume. Get as many mortgage customers as possible, in all market segments. Now, CEO Charlie Scharf will focus on lending to his existing clients, as well as improving his service offerings for minorities.
A major driver for the turnaround has been the Fed’s interest rate policy. While it has seen the net interest margin rise substantially, demand for mortgages has fallen to the ground. Fixed 30-year mortgages have gone from interest rates below 3% to around 7%.
That means the average monthly mortgage has increased by hundreds of dollars a month, putting dream homes out of reach for many potential buyers.
Wells Fargo is obviously concerned about the long-term ramifications of this change in interest rate policy.
The company has had to deal with its fair share of problems, even after the financial crisis of 2008. This fundamentally changed the way lending operates in the US, and as one of the largest home lenders in the country, have felt the full force of the changes in regulation.
To make matters worse, Wells Fargo came under scrutiny for a cross-selling scandal in 2016, which ultimately ended in a $3 billion deal. With this recent history, the bank has become much more risk-averse, and according to head of consumer lending Kleber Santos, they are “very aware (of) the work we need to do to restore public confidence.”
Unfortunately for bank employees, this means layoffs. While no official numbers have been released, top executives have made it clear that there will be a significant reduction in their mortgage trading department.
Internally, the writing has been on the wall for some time, with the mortgage portfolio at the bank. up to 90% at the end of 2022.
Wells Fargo aligns with major competitors
With the mortgage market becoming a much more challenging market after 2008, many of Wells Fargo’s biggest competitors have already stepped back from the mortgage lending business.
Companies like JPMorgan Chase and Bank of America have become much more focused on their investment banking business, as well as unsecured loans such as credit cards and personal loans.
The investment banking side of the business can be immensely profitable, while unsecured loans come with a much lower due diligence requirement and much lower sums (and therefore risks) involved with each individual transaction.
What does this mean for the real estate market?
It certainly isn’t going to help things. The housing market has been under significant pressure since early 2022, with the Federal Reserve’s rate-tightening policy dropping the hammer on transaction numbers.
Volumes have plummeted, with new buyers facing the prospect of much higher repayments, and existing homeowners all but locked into their current mortgage deals.
The problem is likely to get worse. Inflation remains incredibly high by historical standards, and Fed Chairman Jerome Powell has made it clear that he won’t stop until he hits his 2-3% target rate.
Less competition is likely to only make it more difficult for those looking for houses, as well as other sectors, such as real estate agents, who depend on volumes to make money.
That said, it’s not like Wells Fargo is the only game in town. The largest mortgage lender in the United States remains Rocket Mortgage (formerly Quicken Loans), who wrote $340 billion value of mortgages in 2021. United Wholesale Mortgage made $227 billion that same year and Wells Fargo was third with $159 billion in new mortgages.
What about investors?
Wells Fargo’s stock price has been mostly flat on the news, suggesting that investors aren’t putting much stock into the housing market right now.
Narrowing of focus has been a theme that we are seeing, not just in the financial sector, but in many others. Particularly technology. It makes sense. When markets get a bit choppy, focusing on core, profitable services can be a sensible plan until the good times return.
It’s one of the reasons ‘value’ stocks seem to be making a comeback. In the years leading up to 2008, the biggest winners in the stock market were those in the financial sector. Record profits were being made in a sector that is typically priced based on current cash flow, rather than potential future growth prospects, as we see in technology.
Of course, that bubble burst, and in the wake of an era of cheap credit, we saw growth stocks (ie technology) become darlings of investment portfolios.
Now the pendulum seems to be swinging back. With interest rates rising for the first time in more than a decade, high-growth companies are not looking so attractive. Not only that, but the banking sector has become much more regulated, which may help ensure that there is no repeat of the 2008 crisis.
But as an individual investor, how do you navigate these changes? How do you know when it’s time to sell your value stocks and buy growth stocks? Or sell those growth stocks to buy momentum stocks?
Honestly, it’s not easy.
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