The latest issue in Wells Fargo’s mortgage business is a gap between the bank’s approval rates for Black and White homeowners who rushed to lower interest payments amid the Covid-19 pandemic. About 47% of Black people who filled out refinancing applications with Wells Fargo in 2020 were approved, compared with 72% of White homeowners. Since Bloomberg spotlighted the data, Wells Fargo has faced federal lawsuits and renewed scrutiny from lawmakers.
Wells Fargo has said it treats all potential borrowers consistently, regardless of their race or ethnicity, and that an internal review of 2020 refinancing decisions showed “additional, legitimate, credit-related factors” were responsible for the differences.
Mortgage Cowboys
Shrinking — even in a downturn — will be complicated. Economic uncertainty and higher Fed rates can hurt the value of some mortgage assets. The bank will also have to navigate the OCC’s restriction on transferring many servicing customers out of the firm. Executives expect the process may take years.
Once done, it will close a chapter in the industry.
Banks dominated the home-loan market heading into 2008 financial crisis. After the bust, many large lenders faced tens of billions of dollars in liability from mortgage-related operations and retreated. Bank of America Corp., for example, originated more than $100 billion of new home loans in a single quarter in 2009 after scooping up scandal-ridden Countrywide Financial. By 2018, it was originating less than 10% of that.
Wells Fargo held itself out as the exception. The firm avoided an annual loss in the crisis and then rode a surge in refinancings, making mortgages a key part of its identity. By early 2012, industry observers were estimating it commanded a record share of the US mortgage market with more than 33%.
Executives wanted to go further. At a gathering of more than 500 loan officers that year, sales managers dressed up as cowboys with fake mustaches on their lips and six shooters on their hips, urging staff to lend more. The invitation read: “40% or BUST!!”
Boosted by its mortgage engine, the bank would go on to post six straight years of record profits. And for much of that period, it had a greater market value than JPMorgan.
But the scandals that started erupting in 2016 ended that. Wells Fargo is now the third most valuable bank in the US with a market capitalization of $174 billion — less than half JPMorgan’s.
Meanwhile, a new breed of online mortgage lenders swelled to fill the void left by banks. Quicken Loans grew from the 34th-largest provider of mortgages when the housing market reached its previous peak in 2006 to eventually pass Wells Fargo in originating new home loans. Along the way, it changed its name to Rocket. The venture still holds and services far fewer mortgages than the bank.
Bankers grouse that they are beholden to more regulators, and with that comes greater odds of probes and scandals.
“It is very different today running a mortgage business inside a bank than it was 15 years ago,” Scharf said at a June conference. “That does force you to sit back and say, `What does that mean? How big do you want to be? Where does it fit in?’”
This article was provided by Bloomberg News.