Wells Fargo & Company (NYSE:WFC), until recently widely regarded as the nation's leading originator of subprime mortgage loans, reported record net income for the first quarter of $2.24 billion, up 11 percent from prior year's $2.02 billion and up 12 percent from fourth quarter 2006. The company's gain in earnings came despite $124 million in pre-tax write downs due to the company's subprime mortgage exposure, including $90 million in adjusted carrying value for subprime loans on the bank's books. Wells also said revenue was reduced by $34 million due to a decline in the value of its mortgage servicing rights. â€œWe are experiencing higher losses in our home equity portfolio relative to the historically low and unsustainable levels experienced in 2006," said cheif credit officer Mike Loughlin. "We see particular stress in certain regional markets and in loans acquired from correspondents." Loughlin said the company, like many operating in the subprime lending market, has tightened its underwriting standards and is focusing additional collections resources on targeted portfolio segments. "We expect higher but manageable losses throughout 2007 in the home equity portfolio," he said. Loughlin continued to stress that the company's on-balance sheet exposure to subprime loans in minimal, and that none of its loans held for investment were originated through correspondent or warehouse lending channels -- all loans on the company's balance sheet were originated through Wells Fargo Financial, the company's retail lending channel. â€œWe conservatively underwrite Wells Fargo Financial real estate secured loans," he said. "Income is verified for all borrowers; there are no reduced documentation or stated income programs. Borrowers must have what we call minimum â€˜residual' income or cash flow after all debt service to qualify for these loans. While we are confident our portfolio will continue to perform better than the industry, we purchased private mortgage insurance on higher loan-to-value loans to mitigate our risk. Our total residential real estate portfolio is geographically diverse and we believe the portfolio has a minimal amount of adjustable mortgage rate reset risk in the next 12 months.â€? Residential NPLs Up 60 Percent In spite of the company's care in origination, it has not found itself immune from rising delinquencies and associated foreclosure activity, according to the numbers provided in a press statement. Nonperforming residential mortgages, including both first and second liens, are up 60 percent versus year-ago levels. Wells reported $223 million in nonperforming first and second residential mortgage liens for the first quarter of 2007, versus $139 million in the year-ago period. â€œWe are constantly monitoring residential mortgage and auto nonperforming levels and have active programs to determine the best strategy to hold and workout or sell these assets,â€? said Loughlin. Subprime Fundings Drop 15 Percent The bank's home mortgage and home equity operations yielded mortgage originations of $68 billion, up 3 percent from prior year, and mortgage applications of $113 billion, up 19 percent from prior year. Wells also said it mortgage application pipeline at the end of the quarter stood at $57 billion, up 19 percent from prior quarter. Most of the mortgage-driven growth, however, did not come from the company's subprime lending operations. "Nonprime applications of $7.4 billion were down 15 percent on a linked-quarter basis, reflecting the underwriting changes made during the quarter," said Mark Oman, senior EVP at Wells Fargo. For more information, visit http://www.wellsfargo.com.