Wells CEO Touts Performance

“Wells Fargo is not immune to what we may count to be the steepest, fastest and most prolonged decline in residential real estate that we’ve seen in a very long period of time,” John G. Stumpf, president and chief executive officer, said in a conference call reviewed by MortgageDaily.com. “We have not seen a nationwide decline in housing like this since the Great Depression.”

The San Francisco-based bank didn’t make markets in subprime mortgage securities and, as a result, didn’t have to write them down, the CEO noted — adding that he didn’t even know what a structured investment vehicle was until he recently read about it in the news.

“We have minimal direct exposure to hedge funds,” Stumpf continued. “Our exposure to CDOs and asset backed commercial paper conduits is also minimal.”

The bank also avoided exotic programs such as option adjustable-rate mortgages, which Stumpf said hurt market share. But an April report that used data from UBS and Bank of America Securities LLC indicated Wells still had a 4.4 percent subprime market share.

“Of the $2 trillion in mortgages we originated since 2001, only 4 percent were Alt-A or nonprime,” he said. “Wells Fargo Financial has not originated any interest-only, any stated income, option ARMs and negative amortizing … residential real estate loans.”

In June, Wells Fargo Home Mortgage terminated its correspondent alternative lending operations. The company disclosed in July it would no longer accept subprime business from mortgage brokers, noting that continued subprime turmoil made it unprofitable to continue subprime wholesale.

Despite the cutbacks and conservative moves, however, the company still ranked as the second biggest U.S. originator in the third quarter with $68 billion in reported fundings. It also ranked as the second biggest residential servicer, with a servicing portfolio of around $1.32 trillion on Sept. 30 — which Stumpf said accounted for a 13.7 percent market share.

Wells did suffer some losses from its mostly prime mortgage warehouse and pipeline because of widening in secondary market spreads during the third quarter, Stumpf said. It also wrote down repurchased loans and increased the reserve for repurchases.

But he added that the same unusual secondary market movement benefited mortgage servicing income and helped offset the charges.

Home equity loans outstanding on Sept. 30 were $83 billion, including $40 billion in seconds liens behind a Wells Fargo first mortgage — which perform better, and $12 billion in first lien position, according to the presentation.

Net credit losses on HELs were 0.77 percent in the third quarter, up from 0.44 percent the prior period. The increase in credit losses was primarily limited to the highest combined loan-to-value mortgages and resulted from home price declines. One-quarter of HEL losses were on loans acquired from the discontinued correspondent channel — even though the unit only originated 7 percent of HEL loans outstanding.

With HEL credit losses expected to rise in the current quarter, the company has lowered LTVs and tightened underwriting on its HELs, the executive explained.

While pricing was raised during the third quarter on nonconforming loans — reflecting reduced liquidity in the capital markets, Stumpf said the company “remained open for business,” placing many of the loans in its portfolio.

Stumpf’s comments echoed those of Wells Chairman Richard M. Kovacevich two months ago at the Bank of America 37th Annual Investment Conference in San Francisco.

“Our disciplined approach to risk management, our strong capital ratios, our industry leading credit ratings, our liquidity and the diversity of our earnings will enable us to continue to take advantage of attractive opportunities, particularly as a result of the recent turmoil in the credit markets,” Kovacevich said at the conference.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: mtgsam@aol.com