Wells Fargo, once the No. 1 player in mortgages, is stepping back from the housing market

Wells Fargo retreated from the multi-trillion dollar market for US mortgages amid regulatory pressure and the impact of higher interest rates.

Instead of the previous target of reaching the majority of Americans, the company will now offer home loans only to bank and wealth management customers and borrowers in minority communities, CNBC has learned.

The double factor of the credit market that collapsed since the Federal Reserve began to raise rates last year and increased regulatory oversight – both industry, and specifically for Wells Fargo after the 2016 fake account scandal – led to the decision, said consumer credit chairman Kleber Santos.

“We are very aware of Wells Fargo’s history since 2016 and the work that needs to be done to restore public trust,” Santos said in a phone interview. “As part of that review, we determined that our home loan business was too large, both in terms of size and scope.”

This is the latest, and perhaps most important, strategic change that CEO Charlie Scharf has made since joining Wells Fargo in late 2019. Mortgages are the largest category of debt held by Americans, making up 71% of the total $16, 5 trillion household balance. . Under Scharf’s predecessor, Wells Fargo prided itself on its large share of home loans — it was the nation’s top lender in 2019, according to industry newsletter Inside Mortgage Finance.

Now, as a result of this and other changes Scharf has made, including pushing more revenue from investment banking and credit cards, Wells Fargo will look more like its megabank rivals. Bank of America and JPMorgan Chase. Both companies gave up mortgage stocks after the 2008 financial crisis.

Following the once-huge mortgage player in slimming down operations that has implications for the US mortgage market.

When banks pulled back from home loans after the disaster that was the housing bubble in the early 2000s, non-bank players were included Rocket Mortgage quickly fill the void. But these newer players are not as tightly regulated as banks, and industry critics say they could be exposing consumers to pitfalls. Today, Wells Fargo is the third largest mortgage lender behind Rocket and United Wholesale Mortgage.

As part of the retrenchment, Wells Fargo is also closing a correspondence business that sells mortgages through third-party companies and “significantly” shrinking its mortgage servicing portfolio through asset sales, Santos said.

Correspondence channels are an important business channel for San Francisco-based Wells Fargo, which has become increasingly important as lending activity generally shrunk last year. In October, the bank said 42% of the $21.5 billion in loans it originated in the third quarter were correspondent loans.

The sale of mortgage servicing rights to other industry players will take at least a few quarters, depending on market conditions, Santos said. Wells Fargo is the largest mortgage servicer in the US, which includes collecting payments from borrowers, with almost $1 trillion in loans, or 7.3% of the market, in the third quarter, according to data from Inside Mortgage Finance.

Overall, the changes will lead to a new round of layoffs for the bank’s mortgage operations, executives admit, but they refuse to calculate exactly how many. Thousands of mortgage workers were laid off or voluntarily left the company last year as business slumped.

The news will not come as a surprise to investors or employees. Wells Fargo employees had speculated for months about the changes after Scharf telegraphed them several times last year. Bloomberg reported in August that the bank was considering canceling or terminating its correspondent loans.

“It’s a very different mortgage business in banks today than it was 15 years ago,” Scharf told analysts in June. “We’re not going to be as big as history” in the industry, he added.

Wells Fargo said it is investing $100 million in minority homeownership efforts and placing more mortgage consultants in branches located in minority communities.

“Our priority is de-risking the space, focusing on serving our own customers and playing the role that society wants us to play as it relates to the racial home ownership gap,” Santos said.

The mortgage shift marks what could be the last major business change Scharf will make after splitting the bank’s operations into five divisions, bringing on 12 new operating committee members and creating a diversity segment.

In a telephone interview, Scharf said he did not expect to make any other major changes, warning that the bank would have to adapt to changing circumstances.

“Given the quality of the five main businesses in the franchise, we think we are positioned to compete with the best out there and win, whether it’s banks, non-banks or fintechs,” he said.