Wells Fargo is falling behind in the mortgage market

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  • Wells Fargo, the nation’s third-largest mortgage lender, is pulling back from the mortgage market.
  • While they won’t get out of it entirely, they will focus solely on offering mortgages to their existing clients, and those in minority communities.
  • It’s a big change that will see Wells Fargo take the lead from rivals like Bank of America and JPMorgan Chase, focusing on investment banking and unsecured lending like credit cards.

Wells Fargo, one of the three largest mortgage lenders (and once ranked No. 1) in the US, is falling behind in the mortgage market. They’re not quite getting out of it, but they’re making drastic changes to their strategy, in one of the biggest changes we’ve seen in years.

Wells Fargo’s goal was to enter (and on home deed) as many American homes as possible. Now they are looking to bring their main business more in line with their biggest competitors, such as Bank of America and JPMorgan Chase, which cut mortgage offerings after the 2008 financial crisis.

It is the latest change in the shifting fortunes of Wall Street, which has continued to turmoil and change after 2008. This was partly a result of new regulations and corporate lessons learned from the crash, but also as a result of pressure from the sector’s disrupters.

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 affect the mortgage industry?

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What changes is Wells Fargo making?

Wells Fargo’s strategy used to be to focus on net volume. Obtaining the largest possible number of mortgage customers in all sectors of the market. Now, CEO Charlie Scharf will focus on lending to his existing clients, as well as improving their service offering to minorities.

The main driver of change was the Federal Reserve’s interest rate policy. While it saw net interest margin increase dramatically, demand for mortgages fell through the floor. Fixed 30-year mortgages have gone from interest rates under 3% to around 7%.

That means the average monthly mortgage has gone up by hundreds of dollars a month, putting dream homes out of reach for many potential buyers.

Wells Fargo is clearly concerned about the long-term ramifications of this change in interest rate policy.

The company has had to deal with its fair share of issuances, even after the 2008 financial crisis. This fundamentally changed the way lending works in the US, and as one of the nation’s largest housing lenders, they’ve felt the full force of the regulatory changes.

To make matters worse, Wells Fargo came under scrutiny for its cross-selling scandal in 2016, which ultimately ended in a $3 billion settlement. With such a recent history, the bank has become more risk averse, and according to head of consumer lending Kleber Santos, they “are very aware (of the work) we need to do to win back the public’s trust.”

Unfortunately for bank employees, this means layoffs. While no official numbers have been released, senior executives have made it clear that there will be a significant reduction in the amount of the mortgage operations department.

Internally, the writing has been hanging on the wall for some time, with the bank’s mortgage pipeline up to 90% in late 2022.

Wells Fargo matches major competitors

With the mortgage market becoming more challenging after 2008, many of Wells Fargo’s largest competitors have already dropped out of the mortgage lending business.

Companies such as JPMorgan Chase and Bank of America have focused more 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 very profitable, while unsecured lending comes with much lower due diligence requirements and much lower amounts (and thus risks) associated with each individual transaction.

What does this mean for the housing market?

It certainly won’t help things. The housing market has been under a lot of pressure since the start of 2022, with the Fed’s interest rate tightening policy dropping the hammer on transaction numbers.

Volumes plummeted, as new buyers faced the prospect of much higher installments, and existing homeowners were all caught up in existing mortgage deals.

The problem is likely to get worse. Inflation is still incredibly high by historical standards, and Federal Reserve Chairman Jerome Powell has made it clear that it will not stop until it hits its target rate of 2-3%.

Less competition is likely to make it tougher for those looking for homes, as well as other sectors such as realtors who rely on volumes to make their money.

Still, 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 dollars The value of mortgages in 2021. United Wholesale Mortgage made $227 billion that same year, and Wells Fargo came in third with $159 billion in new mortgages.

What about investors?

Wells Fargo’s share price was broadly flat in the news, suggesting that investors aren’t putting a lot of stock into the housing market right now.

Narrowing focus has been a theme that we’re seeing, not just across the financial sector, but many other sectors. technology in particular. It seems reasonable. When the markets get a little volatile, focusing on basic and profitable services can be a sensible plan until the good times return.

It’s one of the reasons why “value” stocks are returning. In the years leading up to 2008, the biggest winners in the stock market were those in the financial sector. Record earnings have been achieved in a sector that is generally priced on current cash flow, rather than potential future growth projections as we see in technology.

Of course that bubble burst, and in its aftermath and the era of cheap credit, we saw growth stocks (i.e. technology) become portfolio darlings.

Now the pendulum seems to be swinging back. With interest rates rising for the first time in over a decade, high-growth companies don’t look attractive. Not only that, but the banking sector has become much more regulated, which could help ensure that the crisis of 2008 is not repeated.

But as an individual investor, how do you deal with 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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