The fate of Wells Fargo & Co.’s mortgage business has been the subject of industry speculation in the wake of a Bloomberg report indicating that the lending giant plans to shrink its enormous mortgage footprint, including a likely pull-back from the correspondent lending business.
Shortly after that story went live, analysts at Keefe, Bruyette & Woods(KBW) published a report stating that if Wells does exit the correspondent lending market, it “would meaningfully reduce the company’s servicing portfolio, since that channel is primarily a source of mortgage servicing rights (MSRs).”
“We estimate that around 10% of [Wells Fargo’s] service volume is Ginnie Mae/FHA [Federal Housing Administration],” the KBW report states. “The reduced role of Wells Fargo in servicing should make it easier for others to grow GSE servicing.
“However, there are far fewer participants in Ginnie Mae servicing, so the reduced role of Wells in that market might result in weaker pricing, which in turn could mean higher borrower rates for FHA borrowers.”
KBW’s report states that Wells Fargo has originated year to date as of August some $28 billion in correspondent loans, adding that the bank’s estimated market share in that channel is 5% to 6%.
“Removal of that market share could benefit other big correspondent mortgage originators,” KBW report adds. “Pennymac Financial (PFSI-MP) is by far the largest correspondent mortgage originator, with a 15% market share over the past 12 months.
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Wells Fargo’s correspondent lenders originate, underwrite and close mortgage loans and then sell them to the bank. The lender’s correspondent clients include other banks and mortgage companies.
Although no one can accurately predict the future course of events with certainty, the revelations in the Bloomberg report and KBW’s subsequent assessment may be a case of following a horse that long ago left the barn. In reality, Wells Fargo has been in the process of revamping its mortgage business for several years, ever since CEO Charlie Scharf came onboard with the bank in the fall of 2019.
During the company’s second-quarter 2022 earnings call this past July, Scharf, responded to an analyst question about whether the bank is “strategically thinking about where mortgage fits in,” as follows:
“That’s something that we’ve been doing ever since I got here,” Scharf responded. “… If you just go back and look at how big we were in the mortgage business, we were a hell of a lot bigger than we are today….
“… We’re not interested in being extraordinarily large in the mortgage business just for the sake of being in the mortgage business. …And so … when you look at how much we’re originating versus the size of our servicing business, the servicing business over time will become smaller. And I think that’s a smart and good thing for us for many reasons.”
Wells Fargo reported net income of $3.1 billion on revenue of $17 billion for the second quarter of this year, down from net income of $6 billion on revenue of $20.3 billion for the year-earlier period.
Mike Santomassimo, chief financial officer at Wells Fargo, said during the second-quarter earnings call that mortgage originations at the bank were down 10% in the second quarter, compared with the prior quarter, and refinances as a share of total originations declined to 28%.
“Lending revenue declined 53% from a year ago and 35% from the first quarter driven by lower mortgage originations and compressed margins given the higher-rate environment and continued competitive pricing in response to excess capacity in the industry,” Santomassimo said. “After increasing over 150 basis points in the first quarter, mortgage rates increased over 100 basis points in the second quarter.”
A glimpse of the numbers behind Wells Fargo’s efforts to strategically adjust its mortgage business shows up in an August report from mortgage-data analytics firm Recursion. The report, which covers only agency-related (Fannie Mae, Freddie Mac and Ginnie Mae) loan-servicing data, reflects year-to-date figures current as of the first week of August.
Wells Fargo ranked first overall for all-agency servicing, with 7.5% market share and a $616.7 billion MSR portfolio as of early August, according to the Recursion report. But the lender’s all-agency servicing portfolio has been downsized over the past several years. It was $770.7 billion at the end of 2020, a year after CEO Scharf’s arrival, and $648.4 billion in 2021.
In terms of Ginnie Mae loans serviced, Wells Fargo ranked fifth overall, as of the first week of August, Recursion’s data shows, with a 5.5% market share and a $116.9 billion servicing portfolio. There, too, its portfolio has been shrinking since at least 2020, when it was $160.8 billion — and $127.1 billion last year.
In terms of new issuance [as opposed to legacy loans serviced] Wells Fargo recorded only $8.7 billion in new Ginnie Mae issuance/servicing year to date through the first week of August, compared with $20.8 billion for all last year.
Ginnie Mae serves as the government-backed securitization pipeline for loans insured by government agencies that provide loan-level mortgage-insurance coverage through their lending programs. Unlike Fannie and Freddie, however, Ginnie does not purchase loans.
Rather, under the Ginnie Mae program, lenders originate qualifying mortgages that they can then securitize through the agency. Ginnie guarantees only the principal and interest payments to purchasers of its bonds, which are sold worldwide. The underlying loans carry guarantees, or a mortgage insurance certification, from the housing agencies approving the loans — which include the FHA as well as by the U.S. departments of Veterans Affairs and Agriculture.
The holders of Ginnie Mae MSRs, primarily nonbanks today, are the parties responsible for assuring timely payments are made to bondholders. And when loans go unpaid due to delinquency, those servicers still must cover the payments to the bondholders.
“Ginnie Mae loans tend to have, or tend to be, more delinquent than conventional products,” Azad Rafat, MSR senior director at Mortgage Capital Trading Inc. in San Diego, said in a prior interview on the subject.
The share of Ginnie Mae-backed loans in forbearance was 1.26% as of July 31, compared with 0.34% for Fannie Mae and Freddie Mac loans, according to the Mortgage Bankers Association’s (MBA’s) most recent loan-monitoring survey. The total delinquency rate for FHA loans stood at 8.85% as of the end of the second quarter, MBA reports, compared with 2.64% for conventional loans.
The leader in Ginnie Mae loan servicing, according to Recursion’s data, is Freedom Mortgage, with a 12.3% market share and a $254.8 billion Ginnie Mae servicing portfolio as of early August 2022. Its new Ginnie Mae issuance this year through early August totaled $21.1 billion, compared with $107.1 for all last year.
Pennymac ranked second in Ginnie Mae loan servicing as of the same period, with a $236.7 billion portfolio of Ginnie Mae loans serviced and an 11.4% market share. Its new issuance year to date through the first week of August stood at $41.6 billion and last year issuance totaled $104.4 billion.
On the all-agency front, according to the Recursion data, the two closet competitors for Wells Fargo and its 7.5% market share, are Pennymac, No. 2, with a 6.2% market share; and Rocket Mortgage, No. 3, with a market share of 6%. Both exceeded Wells Fargo in new all-agency issuance/servicing by large numbers year to date through the first week of August — with Wells Fargo’s all-agency issuance at $51.1 billion, compared with Pennymac, $79.3 billion and Rocket, $99.3 billion.
So, in terms of the ultimate impact of Wells Fargo’s mortgage-business shrinkage, it’s worth recognizing that any effect is already baked into housing-market dynamics and not likely to shock the system. Wells Fargo’s competitors in the mortgage space, especially the large nonbanks, have so far been picking up the slack, at least in the huge agency market — even in the riskier Ginnie Mae/FHA segment, Recursion’s data shows.
Li Chang, founder and CEO of Recursion, pointed out in a prior interview that “Wells has a huge legacy book” of business. It appears, that legacy is in the process of being right-sized for the future.
“We’ll still be originating mortgages across the spectrum, some of which we’ll keep on the balance sheet when it makes sense,” Scharf said during Wells Fargo’s second-quarter earnings call. “And others of which we’ll sell, and we’ll have an MSR.
“Again, if you just look at how much we originated historically, versus what we’re originating today, it [the bank’s servicing portfolio] will naturally just come down over time.”