(Update 1: corrects for Wells Fargo still being in wholesale, but ‘pulling back’ significantly from the channel.) Wells Fargo reported its fourth quarter earnings today, and said that earnings fell 38 percent as the bank saw credit quality deterioriate. Net income fell to to $1.36 billion during the fourth quarter, or 41 cents a share, from $2.18 billion, or 64 cents, in the year-ago period. Much of the drop in earnings came as the bank ramped up reserves for loan losses to $5.52 billion, a net increase of $1.5 billion from the third quarter due largely to expected losses in the bank’s home equity portfolio. Reinforcing its move to build loss reserves, the pace of HEL charge-offs quickened dramatically during the fourth quarter, increasing 81 percent to $277 million. More borrowers in trouble Borrowers were 90 days or more behind on $1.56 billion worth of outstanding loans, excluding insured and GNMA guaranteed loans; $487 million of that amount was attributable to residential first and second mortgages, Wells said. Total nonperforming assets were $3.87 billion at the end of 2007, a 22 percent increase compared to $3.18 billion in the third quarter. Total NPAs include more than just 90+ day delinquencies. “The majority of the increase in nonperforming assets was concentrated in the first mortgage loan portfolio ($132 million in Wells Fargo Home Mortgage and $230 million in Wells Fargo Financial real estate) and was due to the national rise in foreclosure rates,â€? said chief credit officer Mike Loughlin. “Additionally, due to illiquid market conditions, we have decided to hold more foreclosed properties than we have historically.â€? For the record, I personally don’t think Wells “decided” to hold REO; I think that market conditions are making it impossible for Wells, and any foreclosing lender, to actually turn over any of its inventory. Loan production drops, servicing grows Origination volume fell 20 percent in the fourth quarter relative to the year-ago period, driven primarily by Wells’ pullback in wholesale originations. Total 2007 loan production was off 7 percent from 2006, at $272 billion. “Total fourth quarter originations declined 20 percent from 2006 to $56 billion, primarily reflecting actions we took to exit or reduce volume in third party channels for non-prime, non-conforming and home equity products,” said Mark Oman, senior EVP at Well’s Home and Consumer Finance Group. “Retail mortgage originations declined only 3 percent in the quarter.” Wells’ servicing portfolio continued to grow, however, reaching $1.53 trillion at year-end — up 12 percent from 2006, and enough to make Wells Fargo the largest mortgage servicer in the nation. Countrywide Financial, once the nation’s largest, reported a servicing portfolio of $1.48 trillion at year’s end. For more information, visit http://www.wellsfargo.com. Disclosure: At the time this post was published, the author held no positions in WFC.