Wells Fargo Home Mortgage Jettisons Bad Credit Lending

Wells Fargo & Co., the second-largest U.S. mortgage lender, said Thursday it will close its subprime lending business, which processes and funds home loans for third-party mortgage brokers.

Citing turmoil in the market for riskier home loans, the second-biggest home loan lender behind Countrywide Mortgage, announced the latest measure to preserve its long-term sustainability.

The company also will shut operations in Baton Rouge, Louisiana, causing a loss of 170 jobs, and in Des Moines, Iowa, where it will seek other jobs for 67 workers.

Wells Fargo also cut 444 bad credit home loan jobs last winter.

The San Francisco-based mortgage company, which is also the fifth-largest U.S. bank, said its subprime lending business last year represented 1.6 percent of its $397.6 billion of residential mortgage loans.

“The risks were not worth what we were being paid by investors for our home loans, and we don’t see changes in the foreseeable future,” Michael Lepore, executive vice president at Wells Fargo Home Mortgage, said.

Wells Fargo will still offer some bad credit mortgage loans directly to consumers through Wells Fargo Home Mortgage, however.

The bank is reducing its exposure to lower-quality home mortgage loans amid a U.S. housing market slump in which home prices are stagnating, borrowing costs are rising, and overextended borrowers are defaulting more frequently.

Major credit agencies have recently begun downgrading many bonds backed by bad credit mortgage products that proved riskier than initially thought, hurting their value.

“We started seeing diminishing returns in the fourth quarter of 2006,” Lepore said. “Since then, the subprime marketplace has been in turmoil, and the rating agency downgrades have put it into more turmoil.”

Wells Fargo has said it is less affected by the turmoil than many lenders because it does not make the exotic loans that have caused losses industry-wide to mount up.

In the second quarter, Wells Fargo’s mortgage revenue fell just 6 percent to $689 million. Earlier this week, the company said it stopped offering 2/28 home loans, which carry low fixed rates for two years and then can float to much higher rates.

Other lenders have stopped making such loans, and JPMorgan Chase & Co. and Washington Mutual Inc. have stopped making bad credit mortgage loans with fixed terms shorter than five years.

SOURCE: San Diego Union-Tribune