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Wells Fargo Exiting Correspondent Lending & Reducing Servicing

David Krechevsky
Jan 10, 2023
Wells Fargo Bank

Bank announces strategic plans to 'create a more focused home lending business.'

KEY TAKEAWAYS
  • Wells Fargo plans to exit correspondent lending and reduce the size of its servicing portfolio.
  • Also plans to broaden $150 million investment from the its Special Purpose Credit Program to include purchase loans.

Less than five months after a company executive told clients that correspondent lending “continues to play a key role,” Wells Fargo on Tuesday announced plans to exit the correspondent business.

In a news release posted to its website, the nation’s fourth-largest bank by assets announced “strategic plans to create a more focused home lending business” that includes “exiting the correspondent business” as well as plans to reduce the size of its mortgage servicing portfolio.

“Mortgage is an important relationship product, and our goal is to continue to be the primary mortgage lender to Wells Fargo bank customers as well as minority homebuyers,” Kleber Santos, CEO of consumer lending for Wells Fargo, states in the news release. “We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus.” 

Santos added that, “As the largest bank lender to Black and Hispanic families for the last decade, we remain deeply committed to advancing racial equity in homeownership.”

When Wells Fargo released its third-quarter earnings in October, it reported that home lending totaled $973 million, down 52% from the third quarter of 2021. At the time, it said the lower mortgage banking income was driven by lower originations and gain-on-sale margins, as well as lower revenue from the resecuritization of loans purchased from securitization pools.

In addition to exiting the correspondent business and reducing its servicing portfolio, Wells Fargo said its strategic plans also include:

  • Optimizing the retail team to focus primarily on bank customers and underserved communities; 
  • Broadening existing $150 million investment from the company’s Special Purpose Credit Program (SPCP) to include purchase loans, given the current market environment; 
  • Investing an additional $100 million to advance racial equity in homeownership, including strategic partnerships with nonprofit organizations and community-focused engagements. Wells Fargo said it expects to make “ongoing investments in this area in the years to follow,” and
  • Deploying additional home mortgage consultants in local minority communities.

“We will continue to expand our programs to reach more customers in underserved communities by leveraging our strong partnerships with the National Urban League, UnidosUS, and other nonprofit organizations,” said Kristy Fercho, head of both Home Lending and Diverse Segments, Representation, and Inclusion at the bank. “We also will hire additional mortgage consultants in communities of color.”

The bank said the strategic direction for the Home Lending business and programs to advance racial equity announced Tuesday will “replace the 2016 and 2017 minority homeownership lending commitments made under prior leadership.” 

“In rapidly changing market conditions, this new approach provides flexibility to more quickly address customer needs.” the bank said in the news release. “Additionally, the Special Purpose Credit Program the company announced in April that initially focused on lowering rates for customers refinancing will now broaden to include purchase loans. This $150 million investment will reduce the costs for individuals in underserved communities looking to refinance or buy a home, helping more Black and Hispanic families achieve homeownership.”

Wells Fargo’s announcement of the changes to its Special Purpose Credit Programs comes less than a month after the Consumer Financial Protection Bureau (CFPB) ordered the bank to pay a total of $3.7 billion for violations across several of its product lines, including mortgages, that the agency claims resulted in thousands of customers losing billions of dollars and, in some cases, their homes.

The fine, which Wells Fargo agreed to pay, includes $2 billion in payments to consumers and $1.7 billion in civil penalties.

Scott Olson, executive director of the The Community Home Lenders of America (CHLA), released a statement Tuesday following Wells Fargo's announcement.

"CHLA is deeply disappointed that Wells Fargo is pulling out of the correspondent loan business — pulling out of buying even government agency loans with little or no risk," Olson said. "This action makes it all the more imperative that federal agency mortgage programs — FHA, Ginnie Mae, Fannie Mae, and Freddie Mac — don't pull in at the same time on authority for direct lending access for IMBs (independent mortgage banks), which is critical to maintaining access to credit for underserved and other borrowers."

Tuesday's announcement by the bank is also a 180-degree turn from an email sent in August 2022 by Wells Fargo Senior Vice President Michael Ringwood to clients that said the bank had no intention of exiting correspondent lending.

“Wells Fargo Funding has been a mainstay and a leader in the correspondent space for more than 30 years,” the email stated. “During that time, we’ve navigated multiple market challenges — the Great Recession, the (COVID-19) pandemic — by providing liquidity in the industry and serving the needs of our clients. I want to assure you that we remain committed to working with (and) supporting you, as we have for decades.”

Ringwood went on to say that Wells Fargo is "continuously seeking new business opportunities that best position us to serve our customers, including our correspondent clients. Of course, like companies across the industry today, we are also evaluating our strategy in a dramatically smaller (mortgage) originations market.”

The email was sent in response to a Bloomberg report that said Wells Fargo executives “plan to shrink its vast mortgage empire, which once churned out one of every three home loans in the U.S. and for a time made the bank the most valuable in the nation."

The Bloomberg report continued, “Wells Fargo’s leadership is preparing a retreat that will probably start with the bank’s ties to outside mortgage firms that generated roughly a third of its $205 billion in new home loans last year (2021), according to people with knowledge of the decision.”

Bloomberg reported that Wells Fargo executives said the bank’s “retrenching will almost certainly include paring, or potentially even halting, so-called correspondent mortgage lending, in which Wells Fargo provides funding for loan arranged by outsiders.”

The announcement of the bank’s decision to exit correspondent lending and reduce its servicing portfolio comes just three days before the bank reports its fourth quarter and year-end earnings for 2022. The bank is scheduled to release its financial results Friday morning.

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