Who is positioned to capitalize on Wells Fargo’s mortgage withdrawal
The fate of Wells Fargo & Co.mortgage business has been the subject of speculation in the industry following a Bloomberg report indicating that the credit giant plans to reduce its huge mortgage footprint, including a likely withdrawal from the corresponding lending business.
Shortly after this story broke, analysts at Keefe, Bruyette & Woods(KBW) released a report stating that if Wells exits the correspondent lending market, it would “significantly reduce the company’s service portfolio, as this channel is primarily a source of Mortgage Servicing Rights (MSR)”.
“We estimate that about 10% of [Wells Fargo’s] service volume is ginnie mae/FHA [Federal Housing Administration]“, says the KBW report. “Wells Fargo’s reduced role in maintenance should make it easier for others to develop GSE maintenance.
“However, there are far fewer participants in the Ginnie Mae service, so Wells’ reduced role in this market could lead to lower pricing, which in turn could mean higher borrowing rates for FHA borrowers.”
The KBW report said Wells Fargo has originated some $28 billion in matching loans since the start of the year in August, adding that the bank’s estimated market share in this channel is 5% to 6%.
“The removal of this market share could benefit other large matched mortgage originators,” the KBW report adds. “Pennymac Financial (PFSI-MP) is by far the largest originator of matched mortgages, with a market share of 15% over the past 12 months.
“Other prominent correspondents are Amerihome (owned by WAL/Western Alliance Bancorp.) and New Ground/Caliber(RITM/Rhythm Capital).”
Wells Fargo correspondent lenders originate, underwrite and close mortgages, then resell them to the bank. The lender’s corresponding customers include other banks and mortgage companies.
While no one can accurately predict the future course of events with certainty, the revelations in the Bloomberg report and subsequent KBW assessment may be a case of following up on a horse that left the stable a long time ago. In fact, Wells Fargo has been revamping its mortgage business for several years, ever since CEO Charlie Scharf joined the bank in the fall of 2019.
During the company’s second quarter 2022 earnings call last July, Scharf responded to an analyst’s question about whether the bank was “thinking strategically in place of the mortgage,” as follows:
“It’s something we’ve been doing since I got here,” Scharf replied. “…If you go back and look at how big we were in the mortgage business, we were a lot bigger than we are today….
“…We’re not interested in being extraordinarily big in the mortgage business just for the sake of being in the mortgage business. …And so… when you look at how much we are behind relative to the size of our service business, the service business over time will get smaller. And I think that’s a good, smart thing for us for a lot of reasons.
Wells Fargo reported net profit of $3.1 billion on revenue of $17 billion for the second quarter of this year, down from net profit of $6 billion on revenue of $20.3 billion dollars for the period of the previous year.
Mike Santomassimo, Wells Fargo’s chief financial officer, said on the second-quarter earnings call that mortgage originations at the bank were down 10% in the second quarter from the prior quarter, and that refinancings as share of total mounts had fallen to 28. %.
“Loan revenue was down 53% from a year ago and 35% from the first quarter, driven by lower mortgages and margin compression given the rate environment. higher and maintaining competitive pricing in response to excess capacity in the industry,” said Santomassimo. “After rising more than 150 basis points in the first quarter, mortgage rates rose more than 100 basis points in the second quarter.”
A glimpse of the numbers behind Wells Fargo’s efforts to strategically adjust its mortgage business appears in an August report from a mortgage data analytics firm. Recursion. The report, which only covers agency-related activities (Fannie Mae, Freddie Mac and Ginnie Mae) loan servicing data reflects year-to-date numbers through the first week of August.
According to the Recursion report, Wells Fargo ranked first overall for services for all agencies, with 7.5% market share and an MSR portfolio of $616.7 billion at the start of August. . But the service portfolio of all the lender’s agencies has been reduced in recent years. It was $770.7 billion at the end of 2020, a year after CEO Scharf took over, and $648.4 billion in 2021.
In terms of Ginnie Mae loans served, Wells Fargo ranked fifth overall, as of the first week of August, according to Recursion data, with a market share of 5.5% and a service portfolio of 116.9. billions of dollars. 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 issues [as opposed to legacy loans serviced] Wells Fargo has only seen $8.7 billion in new Ginnie Mae issues/services to date through the first week of August, compared to $20.8 billion for all of last year .
Ginnie Mae serves as a 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 buy loans.
Rather, under the Ginnie Mae program, lenders issue qualifying mortgages which they can then securitize through the agency. Ginnie only guarantees payment of principal and interest to buyers of its bonds, which are sold worldwide. The underlying loans are backed by guarantees, or proof of mortgage insurance, from the real estate agencies approving the loans – which include the FHA as well as the US Departments of veterans affairs and Agriculture.
Ginnie Mae MSR holders, mostly non-banks today, are the parties responsible for ensuring that timely payments are made to bondholders. And when loans go unpaid due to default, these managers still have to cover payments to bondholders.
“Ginnie Mae loans tend to be, or tend to be, more delinquent than conventional products,” said Azad Rafat, MSR senior manager at Mortgage Capital Trading Inc. in San Diego, said in a previous interview on the subject.
The share of loans backed by Ginnie Mae in forbearance was 1.26% as of July 31, compared to 0.34% for loans from Fannie Mae and Freddie Mac, according to the Mortgage Bankers Association‘s (MBA’s) most recent loan tracking survey. The total delinquency rate for FHA loans stood at 8.85% at the end of the second quarter, MBA reports, compared to 2.64% for conventional loans.
Lending service leader Ginnie Mae, according to Recursion data, is Liberty Mortgagewith a market share of 12.3% and a Ginnie Mae service portfolio of $254.8 billion as of early August 2022. Its new Ginnie Mae issue this year through early August totaled 21, $1 billion, compared to $107.1 for all of last year.
Pennymac ranked second in servicing Ginnie Mae loans in the same period, with a portfolio of $236.7 billion in Ginnie Mae loans and a market share of 11.4%. Its new year-to-date issuance through the first week of August was $41.6 billion and issuance last year totaled $104.4 billion.
On the all-agency front, according to data from Recursion, the two closest competitors to Wells Fargo and its 7.5% market share are No. 2 Pennymac with a 6.2% market share. %; and Rocket Mortgage, No. 3, with a market share of 6%. Both have overtaken Wells Fargo in new issues/services for all agencies in large numbers year-to-date through the first week of August – with the issue for all Wells Fargo agencies at 51 .1 billion, against Pennymac, $79.3 billion and Rocket, $99.3 billion.
So, in terms of the ultimate impact of the contraction in Wells Fargo’s mortgage business, it should be recognized that any effect is already built into the dynamics of the housing market and is unlikely to shock the system. Wells Fargo’s competitors in the mortgage business, particularly the large non-banks, have so far taken over, at least in the huge agency market – even in the riskier Ginnie Mae/FHA segment, according to Recursion data.
Li Chang, Founder and CEO of Recursion, pointed out in a previous interview that “Wells has a huge legacy” of business. It seems that this legacy is being dimensioned for the future.
“We will continue to issue mortgages across the spectrum, some of which we will keep on the balance sheet when it makes sense,” Scharf said during Wells Fargo’s second-quarter earnings call. “And others that we’ll sell, and we’ll have an MSR.”
“Again, if you look at where we originated historically, versus where we originated today, it [the bank’s servicing portfolio] will come down naturally over time.