Key learning points
- Wells Fargo, the country’s third-largest mortgage lender, is withdrawing from the mortgage market.
- While not completely abandoning it, they will focus on providing mortgages only to their existing customers and those in minority communities.
- It’s a big shake-up with Wells Fargo leading the way from 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 number one) in the United States, Wells Fargo is withdrawing from the mortgage market. They don’t quite figure it out, but they’re making drastic changes to their strategy, in one of the biggest shakeups we’ve seen in years.
Wells Fargo’s goal used to be to get in (and get on the house deeds) as many American homes as possible. Now they are trying to bring their main business more in line with their biggest competitors, such as Bank of America and JPMorgan Chase, which cut their mortgage offerings after the 2008 financial crisis.
It is the latest change in Wall Street’s fluctuating fortunes, which have continued to experience disruption and change after 2008. This is partly due to the new regulations and the lessons learned from the crash, but also due to pressure from industry disruptors.
For homeowners and potential homeowners, such a major exit from the market will certainly have consequences. So what are they and how is it likely to affect the mortgage industry?
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What changes is Wells Fargo making?
Wells Fargo’s strategy used to be focused on pure volume. Getting as many mortgage customers as possible, in all segments of the market. Now CEO Charlie Scharf will focus on extending loans to their existing customers and improving their service offerings for minorities.
An important driver for the change has been the interest rate policy of the Fed. Although the net interest margin has increased significantly, demand for mortgages has fallen to the limit. 30 year fixed mortgages have gone from interest rates below 3% to fluctuating around 7%.
That means the average monthly mortgage has increased by hundreds of dollars per month, putting dream homes out of reach for many potential buyers.
Wells Fargo is clearly concerned about the longer term implications of this change in interest rate policy.
The company has faced a myriad of issues even after the 2008 financial crisis. This fundamentally changed the way lending works in the US, and as one of the country’s largest home lenders, they have taken the full force of the changes felt in the regulations.
To make matters worse, Wells Fargo came under scrutiny in 2016 for a cross-selling scandal, which eventually ended in a $3 billion settlement. With this recent history, the bank has become much more risk averse and according to Kleber Santos, head of consumer lending, they are “well aware of the work we need to do to restore public confidence”.
Unfortunately for bank employees, this means layoffs. While no official figures have been released, senior executives have made it clear that there will be significant downsizing in their mortgage business division.
Internally, the writing has been on the wall for a while, with the mortgage pipeline at the bank having fallen to 90% by the end of 2022.
Wells Fargo joins major competitors
With the post-2008 mortgage market becoming much more challenging, many of Wells Fargo’s biggest competitors have already taken a back seat in the home loan space.
Companies like JPMorgan Chase and Bank of America have put a lot more focus on their investment banking, as well as unsecured loans like credit cards and personal loans.
The investment banking side of the business can be hugely profitable, while unsecured loans come with a much lower due diligence requirement and much lower amounts (and therefore risk) involved in each individual transaction.
What does this mean for the housing market?
It certainly won’t help matters. The housing market has been under considerable pressure since the beginning of 2022, as the Fed’s interest rate tightening policy drops the hammer on transaction numbers.
Volumes have fallen through the floor, with new buyers facing the prospect of much higher repayments, and existing homeowners nearly locked into their current mortgage agreements.
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 will not stop until it reaches their target rate of 2-3%.
Less competition is likely to make things more difficult for those looking for homes, as well as other industries such as estate agents who rely on volumes to make their 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), which wrote $340 billion in mortgages by 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 stock price has remained largely flat on the news, suggesting that investors aren’t placing many stocks in the housing market right now.
The narrowing of focus is a theme that we see not only in the financial sector, but in many others. Especially technique. It is logical. When the markets get a little choppy, it can be a wise plan to focus on the most important, profitable services until the good times return.
It’s one of the reasons why “value” stocks seem to be making a comeback. In the years before 2008, the biggest stock market winners were the financial sector. Record profits were made in an industry that is generally priced based on current cash flow, rather than potential future growth prospects, as we see in technology.
Naturally, that bubble burst, and in its wake and an era of cheap credit, we saw growth stocks (namely technology) become the darlings of investment portfolios.
Now the pendulum appears to be swinging back. With interest rates rising for the first time in more than a decade, high-growth companies don’t look so attractive. Not only that, but the banking sector is much more tightly regulated, which may prevent us from experiencing a repeat of the 2008 crisis.
But how do you navigate these changes as an individual investor? How do you know when it’s time to sell your value stocks and buy growth stocks? Or selling growth stocks to buy momentum stocks?
Honestly, it’s not easy.
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