By Connie Kim

In the face of a declining mortgage market and heightened regulatory scrutiny, Wells Fargo, the country’s largest depository mortgage lender by volume, is planning for a smaller footprint in correspondent lending and third-party servicing business.

The depository bank will likely shrink or potentially halt correspondent lending, in which Wells Fargo funds the loan arranged by outsiders, Bloomberg reported, citing unnamed sources. The concern for Wells Fargo is that the bank would be responsible for any “reputational damage” when it finances large amounts of loans originated from other firms, Bloomberg said.

The bank’s third-party servicing business is expected to downsize as well, including the servicing of Federal Housing Administration (FHA) loans, the report said. Servicing rights is treated as an asset by banks that generates revenue. According to the firm’s SEC filings, Wells Fargo valued the servicing rights on its balance sheet at $10.39 billion as of the quarter ended June 30, 2022.

In response to the report, Wells Fargo said like others in the industry, it’s evaluating the size of the mortgage business to adapt to a “dramatically smaller originations market.

“I can say that Wells Fargo is committed to supporting our customers and communities through our Home Lending Business,” Tom Goyda, senior vice president of consumer lending communications at Wells Fargo, said in an email.

“We’re also continuing to look across the company to prioritize and best position us to serve our customers broadly,” Goyda said.

Reassessing its mortgage lending is a subject that was brought up by Charlie Scharf, the bank’s CEO, in the bank’s second quarter earnings last month.

When it comes to the servicing business, the primary focus should be on serving its own customer base, Scharf said. He added that on the originations side, the bank is focused on products that will provide solid returns over the cycles “given all the complexities and requirements that banks have that not necessarily everyone else has.”

The bank’s home lending business revenue declined 35% to $972 million in the second quarter from the previous quarter. Origination volume dropped 10% quarter over quarter to $34.1 billion with both retail declining to $19.6 billion and correspondent decreasing to $14.5 billion.

Wells Fargo ranked as the second-largest mortgage lender in the nation by volume in the second quarter, just behind Rocket Mortgage‘s $34.54 billion in volume, according to Inside Mortgage Finance.

(Pennymac is the top correspondent lender in the country, a channel with notoriously slim margins. In the second quarter, Pennymac’s gain-on-sale margin in the channel was just 30 basis points.)

Wells Fargo executives this year repeatedly brought up the bank shrinking its home lending division on the heels of a rate rising environment. In June, Scharf said the bank is “in the process of changing, strategically, where mortgage fits in.”

As with other lenders, Wells Fargo has been cutting costs. Its home lending division in Iowa plans to lay off 125 employees by the end of August, in addition to 72 eliminated mortgage jobs in Iowa across earlier layoffs. Wells Fargo declined to comment on the total size of layoffs in the home lending division this year.

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