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For Wells Fargo, 'The Writing Was On The Wall'

David Krechevsky
Jan 11, 2023
The Office of the Comptroller of the Currency (OCC) has announced the conclusion of its mortgage servicing-related order against Wells Fargo Bank

Decision to exit correspondent lending not a surprise to N.Y. lender.

When Wells Fargo announced late Tuesday that it plans to exit correspondent lending, Scott A. Milner wasn’t surprised.

Milner, president of US Mortgage Corp. in Mellville, N.Y., said his company has sold loans to Wells Fargo for more than 20 years, but guessed correctly that something was up in the fourth quarter of last year.

“We had indications that this was going to happen around October,” Milner said Wednesday. “When our account exec retired, we figured the writing was on the wall there. Our last locked loan was in October, and we took them out of the rotation then.”

Still, the announcement was unexpected; he said Wells Fargo did not notify its correspondent lending clients before making the announcement, which was posted to its website Tuesday afternoon.

More Focused

In its announcement, Wells Fargo described strategic plans to create “a more focused home lending business aimed at serving bank customers, as well as individuals, and families in minority communities.”

In particular, the bank said it “is exiting the correspondent business and plans to reduce the size of its servicing portfolio. These plans continue the work the company has advanced over the past three years to simplify this business.”

Analysts have described the announcement as perhaps the bank’s most significant shift in operations since CEO Charlie Scharf joined Wells Fargo in 2019.

Wells Fargo, the nation’s fourth largest bank by assets, has been the one of the biggest mortgage lenders in the U.S. and previously has stated its goal was to capture 40% to 50% of the U.S. $16.5 trillion mortgage market.

That has changed in the past year as Wells Fargo has reported large drops in quarterly earnings in part due to the downturn in the housing market. For the third quarter last year, the bank 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.

“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, said Tuesday. “ We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus.”

'A Blow To The Industry'

Milner, of US Mortgage Corp., said the decision by Wells Fargo isn’t good news for the industry as a whole.

“To have one of the top four or five largest banks in the country exit a lending space is a blow to the industry,” he said. “It definitely raises some red flags about the business in general.”

After home sales and prices soared during the pandemic, the housing market fell back to earth last year as the Federal Reserve Board battled rampant inflation by increasing the historically low benchmark federal funds rate by 425 basis points. Home sales and refinancings fell as mortgage rates rose.

Milner said US Mortgage, an independent mortgage bank licensed in 49 states, was not immune to the downturn.

“This is our 29th year in business, so it’s safe to say we’ve ridden a lot of these waves in the past,” he said. “I think we’re riding it out as well as anybody could.”

He said the company, which is strictly a retail lender, has been “slowly unwinding” from a hiring spree in 2020 and 2021. It has reduced its staff since March, mostly in operations, he said. 

“The sad reality is most lenders like us have had to unwind the hiring we did in the boom,” Milner said. Wells Fargo, for example, made significant cuts to its Home Lending staff in July. “That’s just unfortunately one of the cycles that our industry has to live with and cope with. But we’ve been able to do that without damaging our turn times or our infrastructure.”

He said U.S. Mortgage has 300 employees, but declined to specify the number of jobs cut.

As for Wells Fargo leaving correspondent lending, Milner said his firm has 20 to 30 other outlets to sell loans to, and that he expects other large financial institutions may step in to fill the void.

“It causes some shakeup and stress in an industry that’s already pretty stressed,” he said. “But I’m not concerned about that as much. Every time you lose someone in the market, it does have some effect on pricing, and it’s possible that other lenders will back off more. But a lot of others have stepped into the space.”

Milner did note, however, that changes at the top level in the industry have been significant. He said neither Bank of America nor Citibank does correspondent lending, while Chase Bank has stopped all of its government lending, and Capital One “got out of the business a couple of years ago.”

“So the big banks have certainly sent a message,” he said. “It’s more of a concern for the whole industry. For a smaller bank it could be a cause of concern. But we have had other players who have stayed in.”

He added that, “it’s hard to find the silver lining here. There have been cases where companies exit and then come back. So who knows what we’ll ultimately see.”

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