Wells Fargo & Co., the biggest U.S. home lender, may post higher profits in the U.S. mortgage market as rivals flee from angry homeowners, more powerful regulators and billions of dollars in losses.
Wells Fargo originated $89 billion of mortgages in the third quarter, more than the combined total of JPMorgan Chase & Co.'s $37 billion and Bank of America Corp.'s $33 billion, according to company statements. Bank of America plans to close a mortgage unit that contributed more than 50% of its new mortgages in the second quarter.
"When you think about being able to grow our mortgage business today, it's a huge opportunity for us," Wells Fargo's chief financial officer, Timothy J. Sloan, said in an Oct. 17 interview. "It's more difficult for some of our competitors, without being specific, than it is for us because they weren't as disciplined as we were. We weren't perfect but we were disciplined."
Wells Fargo may pick up market share and generate bigger profits as competitors cut operations or leave the market altogether. The housing crisis forced more than 100 mortgage lenders to close or seek buyers since the start of 2007. Now mortgage market reforms are increasing the regulatory burden and making it difficult for smaller players to compete, said Glen Corso, managing director of the Community Mortgage Banking Project, a coalition of smaller independent lenders.
Wells Fargo Chief Executive John G. Stumpf said this week that his company now originates one of every four U.S. mortgages, a position held by Bank of America as recently as 2007. The figure is even higher for refinancing, Stumpf said.
"Wells," Corso said, "is finding that they can expand their share of the market without necessarily tightening their margins. They can almost have their cake and eat it too."
Rivals besides Bank of America are retrenching. JPMorgan Chase's correspondent business may be a third of its size in a couple of years, Jamie Dimon, its CEO, said on its Oct. 13 conference call. And MetLife Inc., which already is selling banking assets to avoid regulatory oversight, may seek a buyer for its mortgage operation.
"The regulatory burden they needed to undertake to stay in the mortgage market didn't seem to make sense," Corso said. "While the mortgage market is a challenging place to do business and the regulatory burdens are causing some people to leave the market, it's creating opportunities."
The lack of competitors may mean Wells Fargo can charge more for mortgages since consumers won't be able to shop around, said Thomas Lawler, a former Fannie Mae economist and the president of Lawler Economic and Housing Consulting in Leesburg, Va.
Wells can then earn larger profits when it sells those mortgages to Fannie Mae and Freddie Mac, the two biggest suppliers of financing for home loans, he said.
"When you look at where some large lenders are posting their rates versus the secondary market yields at which they can sell the mortgage to Fannie and Freddie, there is an awful lot of profit embedded there," Lawler said. "The posted rates seem to have a massively higher profit margin for originating the loan than what used to be the case."
Still, Wells Fargo won't have the market to itself. "It would be a mistake to say, 'OK, we're going to get out of it because of legacy problems,' " Dimon said. "Believe me, there's the temptation. It's still the most important financial product for the majority of Americans and it will be for the rest of our lives."
