Key takeaways
- Wells Fargo, the country’s third largest mortgage lender, is stepping back from the mortgage market.
- While not exiting it entirely, they’ll be focusing on only providing mortgages to their existing customers, and those in minority communities.
- It’s a major shake up which will see Wells Fargo take the lead from competitors like Bank of America and JPMorgan Chase, with a focus on investment banking and unsecured lending like credit cards.
One of the three biggest mortgage lenders (and once holding the number one spot) in the United States, Wells Fargo, is stepping back from the mortgage market. They’re not getting out of it entirely, but they’re making drastic changes to their strategy, in one of the biggest shake ups we’ve seen in years.
Wells Fargo’s objective used to be to get in (and on the house deed for) as many US homes as possible. Now they’re looking to bring their main business more closely in line with their biggest competitors, like Bank of America and JPMorgan Chase, who cut their mortgage offerings after the 2008 financial crisis.
It’s the latest change in the shifting fortunes of Wall Street, which has continued to go through disruption and change post-2008. This has been partly as a result of the new regulations and corporate lessons learned from the crash, but also the pressure from disruptors in the sector.
For homeowners and would-be-homeowners, a major exit from the market like this is sure to have consequences. So what are they and how is this likely to impact the mortgage industry?
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What changes are Wells Fargo making?
Wells Fargo’s strategy used to be focused on pure volume. Getting as many mortgage customers as they possibly could, across all segments of the market. Now, CEO Charlie Scharf is going to be focusing on lending to their existing customers, as well as improving their service offer for minorities.
A major driver for the change has been the Fed’s interest rate policy. While it’s seen the net interest margin increase substantially, the demand for mortgages has fallen through the floor. 30 year fixed mortgages have gone from interest rates below 3% to hovering around 7%.
That means the average monthly mortgage has risen by hundreds of dollars a month, putting dream homes out of the reach for many potential buyers.
Wells Fargo is obviously concerned about the longer term ramifications for this change in interest rate policy.
The company has had to deal with its fair share of issues, even after the 2008 financial crisis. This fundamentally changed the way lending operates in the US, and as one of the nations largest housing lenders, they’ve felt the full force of the regulation changes.
To make matters worse, Wells Fargo came under scrutiny for a cross-selling scandal in 2016, which eventually ended in a $3 billion settlement. With this recent history, the bank has become much more risk averse, and according to head of consumer lending Kleber Santos, they are “acutely aware (of) the work we need to do to restore public confidence.”
Unfortunately for employees of the bank, this means layoffs. While no official numbers have been released, senior execs have made it clear that there will be significant downsizing in their mortgage operations department.
Internally, the writing has been on the wall for some time, with the mortgage pipeline at the bank down up to 90% in late 2022.
Wells Fargo aligning with major competitors
With the mortgage market becoming a much more challenging market after 2008, many of Wells Fargo’s biggest competitors have already taken a step back from the home lending business.
Companies like JPMorgan Chase and Bank of America have put much greater focus on their investment banking business, as well as unsecured lending such as credit cards and personal loans.
The investment banking side of the business can be immensely profitable, while unsecured lending comes with a far lower requirement for due diligence and much lower sums (and therefore risk) involved with each individual transaction.
What does this mean for the housing market?
It’s certainly not going to help things. The housing market has come under significant pressure since the beginning of 2022, with the Fed’s rate tightening policy dropping the hammer on transaction numbers.
Volumes have fallen through the floor, with new buyers faced with the prospect of much higher repayments, and existing home owners all but trapped in their current mortgage deals.
The problem is likely to get worse. Inflation is still incredibly high by historical standards, and Fed chairman Jerome Powell has made it clear that they won’t stop until it hits their target rate of 2-3%.
Less competition is only likely to make it tougher for those who are looking for homes, as well as other sectors such as realtors who rely on volumes to make their money.
With that said, it’s not as if Wells Fargo is the only game in town. The biggest mortgage lender in the United States remains Rocket Mortgage (previously Quicken Loans), who wrote $340 billion worth of mortgages in 2021. United Wholesale Mortgage did $227 billion that same year and Wells Fargo came in third with $159 billion worth of new mortgages.
What about investors?
Wells Fargo’s stock price has been broadly flat on the news, suggesting that investors aren’t placing much stock in the housing market right now.
The narrowing of focus has been a theme we’re seeing, not just across the financial sector, but many others. Particularly tech. 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 why ‘value’ stocks appear to be making a comeback. In the years prior to 2008, the biggest stock market winners were those in the financial sector. Record profits were being made in a sector that is generally priced on current cash flow, rather than potential future growth prospects as we see in tech.
Of course that bubble burst, and in its wake and an era of cheap credit, we saw growth stocks (namely, tech) become the darlings of investment portfolios.
Now the pendulum appears to be swinging back. With interest rates rising for the first time in over a decade, high growth companies aren’t looking as attractive. Not only that, but the banking sector has become much more heavily regulated, which may help ensure we don’t see a 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?
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