Wells Fargo this week warned investors the bank’s mortgage business could drop by almost 50% in the second quarter from the prior quarter.
Wells Fargo Chief Financial Officer Mike Santomassimo said higher interest rates have greatly reduced the refinancing market – currently down about 82% from the prior year – and home affordability remains a challenge in the purchase market.
“As you would expect, you’re seeing the refinance volume fall significantly — no surprise,” he said at the Morgan Stanley U.S. Financials, Payments & CRE Conference Tuesday. “You’re still seeing some activity in the purchase market, which is good, but affordability does start to become an issue as rates continue to increase.”
The San Francisco-headquartered bank, the 4th-largest U.S. mortgage lender by volume and largest depository, originated $37.9 billion in the first quarter of 2022, down 21% quarter-over-quarter and 27% year-over-year. The share of refinancings declined from 64% in the first quarter of 2021 to 56% in the same period of this year.
Mortgage banking noninterest income in the first quarter totaled $693 billion, down from $1.3 billion year-over-year. Revenue from home lending fell to $1.5 billion last quarter, down 33% from the prior year.
Those figures will look even worse in the second quarter, Santomassimo told Morgan Stanley conference attendees. Rates on conventional mortgages are now in the 6% range, which will further dampen demand.
Executives at Wells Fargo this year repeatedly have said the home lending division would shrink.
The company recently laid off several hundred workers from its home lending division, citing a need to reduce capacity amid lower origination volumes.
Wells Fargo also has been battling a series of controversies related to minority borrowing and hiring practices. In March, Bloomberg reported Wells Fargo in 2020 rejected more than half of Black homeowners’ refinancing applications. The bank’s 47% approval rate for Black customers was the lowest among major lenders, according to Home Mortgage Disclosure Act (HMDA) data. Its approval rate of white applicants for refis was 72% in 2020.
Wells Fargo denied any wrongdoing and said its underwriting practices are consistently applied regardless of the customer’s race or ethnicity.
At another conference hosted by Bernstein Research in June, CEO Charlie Scharf said Wells Fargo is “in the process of changing, strategically, where mortgage fits in.”
Scharf cited lending standards for conforming loans set by Fannie Mae and Freddie Mac as one of the reasons for a smaller footprint.
“We basically process the applications according to guidelines that the GSEs tell us we should,” Scharf said. “When those produce results, the people like them, we get the kudos for it. If they don’t like them, we get the blame for it, even though we’re just following other people’s underwriting guidelines.”
Scharf also argued depository banks are held to higher standards than nonbank mortgage lenders.
“It’s very different today running a mortgage business inside the bank than it was 15 years ago, and I think appropriately so,” he said. “That does force you to sit back and say, ‘What does that mean? How big do you want to be? Where does it fit in?'”