Wells Fargo hints at how it will downsize its servicing portfolio

By: ameer@trustedteam.com

Wells Fargo offered more details about its approach to downsizing its involvement with mortgages during its earnings call, which revealed that its profitability has been halved compared to last year due to a multibillion-dollar settlement and the need to bulk up reserves.

Declines in origination and servicing also played a role in the reduction as volumes in the former category and valuations in the latter dropped. (Servicing is often considered a natural hedge for origination declines but its valuations can be volatile, and rates dropped enough in Wells’ case enough to hurt valuations modestly in the fourth quarter, while doing little to revive lending.)

“We do not need to be one of the biggest originators or servicers in the industry,” CEO Charlie Scharf said during the earnings call with analysts, reaffirming the company’s downsizing of its mortgage operations and summarizing a big sea change to its leading position in the market.

“I’ve been saying for some time that the mortgage business has changed dramatically since the financial crisis and we’ve been adjusting our strategy accordingly,” he said. “We’re focused on our customers, profitability returns and serving minority communities, not volume.”

To that end, the bank will be careful in choosing the buyers to whom they’re selling servicing from clients who were brought in by other financial institutions.

“They can’t choose to just indiscriminately sell, they’re going to have to sell to people who will continue to take care of the underlying customer,” said Nick Smith, founder, CEO and co-chief investment officer of servicing investor Rice Park Capital Management, said in an interview.

Regulators have been known to step in when banks haven’t. Notably, a New York banking regulator blocked Wells’ attempts to sell a $39 billion portfolio to Ocwen in 2014, citing questions about whether the nonbank could adequately service the loans.

In this week’s earnings call, analysts asked if selling servicing could have some downsides related to the loss of scale or a profit source, but Scharf said the move would be advantageous financially, more so than the correspondent exit.

“The revenue impact of exiting the correspondent business in the short term is not meaningful. It’s a very small number of people….The real benefit comes over time as we reduce the size of the servicing business,” said Scharf.

“Our servicing portfolio can be substantially lower and we’ll still have scale to be able to originate the product, and we would say in a more profitable way than we’re doing it today,” Scharf said. 

In addition to servicing reductions from the correspondent exit, the company is also looking for “intelligent and economic ways to reduce the complexity and the size” of its portfolio, said Scharf.

“It’s not profitable for us today in a whole bunch of these segments where we continue to have servicing,” Scharf said.

Wells executives didn’t otherwise comment specifically on which segments of the portfolio the company might sell.

Smith said it’s likely to be related to the loans that government-sponsored enterprises Fannie Mae and Freddie Mac back.

“I think one could speculate that it’s largely going to be GSE. [Wells’] portfolio probably doesn’t contain as much Ginnie Mae servicing, and I think the jumbo segment is likely to contain more strategic customers,” Smith said. 

While many banks have distanced themselves from the government-insured loans Ginnie protects the securitizations of, and that servicing has been trading at lower valuations with fewer investors recently, Wells is unlikely to exit it entirely as its a key source of lending for minority households. Executives said the company remained dedicated to home lending in general.

“We’re going to continue to stay in the [mortgage] business, but we’re going to view it as part of the importance in the broader relationship. So that means we’ll be originating both conforming and nonconforming mortgages and we’ll continue to make the decision as to what goes on our balance sheet as we have done in the past,” said Scharf.

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