While many lenders are paring back on their subprime loan programs, Wells Fargo today went one step further, saying it will exit the subprime wholesale mortgage lending business altogether. Here’s the formal press release from Well Fargo. The exit will cost 237 employees their jobs, primarily in Baton Rouge; Wells Fargo said it will close its nonprime wholesale operations centers in Baton Rouge and in Des Moines. While the news is getting significant attention — and I’ll get to why in a minute — subprime wholesale originations at Wells Fargo represented only 1.6 percent of total residential originations in 2006, so this move will likely have limited financial impact for Wells Fargo’s mortgage business. What’s really newsworthy here is why Wells Fargo is exiting. Listen to Cara Heiden, WFHM’s division president:

“For the foreseeable future, we believe continued turmoil in the nonprime sector will result in financial returns for our nonprime wholesale channel that are not commensurate with the risks inherent in this business,” Heiden stated. “As a result, we have chosen to discontinue this channel.”

Wells Fargo is a diversified financial services giant — which usually means the company would manage the swings in individual business units rather than throw in the towel altogether. Especially so when we’re talking about a very small piece of the overall mortgage business, one that was ostensibly retained in the past because it had some perceived larger strategic benefit. It’s pretty clear that whatever strategic benefits Wells Fargo thought might have existed for its subprime wholesale mortgage business in the past have long since fallen off a cliff. It’s also clear that the risks of staying in the game must also have been large enough to justify the expense and trouble of actually shutting down an entire wholesale operation, however small its overall contribution to earnings. Of course, Wells Fargo isn’t the first subprime wholesale operation to shut its doors in recent months — numerous others come immediately to mind — but Wells is probably the most high profile of the bunch, and its decision to exit will likely force other wholesalers to take a hard look at their commitment to staying in the subprime market.

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