How Wells Fargo’s correspondent exit changes the game


Wells Fargo’s decision to exit the correspondent origination channel and reduce the size of its mortgage servicing portfolio will have residual effects on both segments, as well as the secondary market.

Correspondent production has been more stable at Wells Fargo than the retail channel. It accounted for $9.1 billion of the bank’s $21.5 billion total mortgage volume for the third quarter of 2022, the most recent period data is available for. This compared with $14.5 billion of $34.1 billion in the second quarter and $16.7 billion of $51.9 billion for the same period in 2021.

NMN011123-Wells Fargo Reax.png

While having ceded the No. 1 spot among originators a while ago, Wells Fargo is still a significant player. United Wholesale Mortgage, the most prolific lender in the third quarter, produced $33.5 billion in loan volume, while Rocket Mortgage did $25.6 billion.

The news of the bank’s exit from correspondent lending was not a surprise to the mortgage market, given that Wells Fargo management telegraphed this move last August.

Still, with a perennial top-five mortgage originator withdrawing from a portion of the mortgage business, the question becomes, who picks up that slack? Would it be the nonbanks or a regional bank that steps into the void? asked John Toohig, the head of whole loan trading at Raymond James.

The possibilities from that latter group include U.S. Bank, Regions Bank, Truist or Flagstar Bank, which just was acquired by New York Community Bancorp.

Coincidentally, just hours after Wells made the announcement Tuesday, real estate investment trust aggregator Redwood Trust disclosed that it priced a preferred stock sale with gross proceeds of $65 million. Uses of those proceeds “may include funding our residential and business purpose lending mortgage banking businesses,” a press release said.

In a research report issued after the stock sale priced, Eric Hagen, an analyst at BTIG noted “We still don’t expect a lot of net growth for the portfolio over the near term, although we’re encouraged by news clips this week alone that Wells Fargo is officially exiting its correspondent business, which could support Redwood Trust’s jumbo aggregation segment, which has softened materially as mortgage rates have risen.”

Wells Fargo’s exit will not have an immediate impact on whole loan pricing, as in most cases Fannie Mae and Freddie Mac remain in the market as the end investor that many of these loans are sold to, Toohig said.

“It is one less balance sheet to play with though,” Toohig said. “So there’s an element of where these loans go to live.” He expects that regional banks could step up in that regard.

“The very large regionals are looking at this as a possibility to continue to grow their business,” Toohig said.

Correspondent mortgage production allows lenders to create mortgage servicing rights more efficiently than they can be purchased in the market, said Bose George, Keefe, Bruyette & Woods analyst, in a research note. This move reduces capacity in the channel, benefitting the remaining originators.

“Wells Fargo is the second-largest correspondent originator; the company’s decision to exit the channel should benefit Pennymac, which is the largest correspondent originator,” George noted. “Other top correspondents are Amerihome (owned by Western Alliance Bancorp.), New Rez/Caliber [Rithm Capital] and Mr. Cooper.”

But for Community Home Lenders of America executive director Scott Olson, much of the impact for small and mid-sized lenders is Wells’ exit removes a Ginnie Mae issuer from the equation.

Expanding on a statement issued Tuesday afternoon, Olson pointed out that independent mortgage bankers originate 90% of Federal Housing Administration and Veterans Affairs loans, as well as 75% of conforming mortgages.

“It is critical to borrowers and to housing markets that the Wells Fargo market exit does not become a contagion of contraction, and it is critical that mortgage loan execution channels are robust,” Olson said. That makes direct IMB secondary market execution of loans — through the cash window at Fannie Mae and Freddie Mac and by securitization of FHA and VA loans by Ginnie Mae issuers “more important than ever.”

“Therefore, the GSEs and Ginnie Mae should be balanced in their financial reviews and standards for continued program eligibility of IMBs, in order to maintain IMBs’ critical role in mortgage access to credit,” said Olson.

KBW estimated that 15% of Wells Fargo’s MSRs are Ginnie Mae.

“For example, if Wells Fargo had exited the correspondent channel at year-end 2021, its MSR would have already been smaller by roughly the size of correspondent originations year-to-date ($37 billion),” said George. “A contraction of the company’s servicing portfolio should make it easier for other holders of MSRs to grow more quickly.”

Black Knight — in the process of being acquired by Intercontinental Exchange in a highly contentious deal — is another entity that could be collateral damage from the Wells Fargo decision, although the impact is likely manageable, said KBW analyst Ryan Tomasello in a separate report. Wells is reportedly one of the larger users of the MSP platform.

The base assumption is that 50% of the correspondent MSRs Wells Fargo sells will be going to other customers that use Black Knight’s technology. Tomasello believes “Black Knight could conservatively see a 50% pricing uplift for any loans that move to other MSP customers.”

Those numbers imply a modest loss to Black Knight of two cents per share, all else being equal, he continued.

But the biggest financial risk to Black Knight is that the handful of large servicers that don’t use MSP — including Mr. Cooper, Rithm, Pennymac and Freedom Mortgage — end up acquiring “meaningful amounts” of the servicing being sold by Wells Fargo or through “natural share gains” created from the correspondent channel exit, Tomasello said.

Related post