Wells Fargo (WFC) strengthened its mortgage repurchase loss reserves in the second quarter after witnessing what it said are behavioral changes from the Fannie Mae and Freddie Mac and after holding conversations with the agencies late in the quarter.
Wells Fargo added $239 million worth of provisions to its mortgage repurchase loss reserve in the second quarter, raising its reserve total to $669 million — 56% more than its first-quarter provision of $430 million. “We believe the additional reserve is appropriate to cover losses associated with these higher expected demands,” Wells Fargo Chief Financial Officer Tim Sloan said on a conference call Friday.
A year ago, mortgage repurchase liability reserves sat at $242 million.
The nation’s largest mortgage lender reported that losses from repurchases expanded $37 million to $349 million in the second quarter from the first. That left its ending balance of reserves for buybacks at $1.76 billion on June 30.
JPMorgan Chase (JPM), on the other hand, narrowed losses in the second quarter to roughly $10 million from buying back faulty mortgages from investors. The bank lowered its expected future liability for repurchases $216 million to less than $3.3 billion as of March 31.
The boost in Wells Fargo buyback reserves occurred even though outstanding repurchase demands declined in the second quarter to $1.26 billion from $1.39 billion. JPMorgan's unresolved repurchase requests from the government-sponsored dropped to $1.6 billion.
Wells attributes the elevated projected demands to loans sold between 2006 and 2008.
Sloan said the bank might add to its reserve balance. “We’re continuing to ensure we have that reserve accrued for appropriately," he said. "The agencies continue to adjust their requests. It’s our best expectations of what the demands will look like in the future.”
In negotiating with Fannie and Freddie, Wells said it will continue to push back on repurchase demands and that the reduced demands in the quarter means that its getting better at challenging GSE demands.
"We have a team and we look through this stuff and we’ve been successful in the past at that," said Wells Fargo Chief Executive John Stumpf on the conference call. "We just want to give a heads up about what we expect in the future. There’s a whole team here that takes this very seriously.”
The San Francisco-based bank reported net income of $4.6 billion in the second quarter, up from $3.9 billion in the year-ago period. In the first six months of 2012, net income reached $8.9 billion, compared to $7.7 billion a year earlier.
Well's loan balance totaled $775.2 billion in the quarter, up $8.7 billion from the previous quarter. Included in the core loan growth are $6.9 billion of commercial loans acquired from WestLB’s subscription finance loan portfolio and BNP Paribas' North American energy lending business.
One- to four-unit family first mortgages, which were up $1.6 billion from first quarter, drove loan growth, among other types of consumer lending businesses.
When asked on the call about what Wells will do when and if its mortgage business slows and it hasn’t cut expenses, Sloan said the bank is improving its ability in its mortgage division to transform permanent expenses into more variable expenses.
“The mortgage business is important to us, but when you look at the percentage of mortgage revenues for last year and the year before, it goes down because we’re growing the rest of the business quite nicely,” Sloan said. He didn't say what would replace a decline in mortgage revenue, but predicted that it will indeed fall “because it's unlikely we’ll continue at this pace for the medium term.”
Wells is experiencing more purchase volume activity as its business remains balanced nicely between servicing and origination, Stumpf said. So when originations ebb, the servicing tends to do better.
The bank originated 34% of all residential mortgages nationwide in the first quarter, widening its lead, as some of its biggest rivals retreated.
“There’s lots of different horses pulling this stage coach,” Stumpf added. “One pulls harder when the other doesn’t pull as hard, so that’s the beauty of this balanced business model.”