Wells Fargo Is Downsizing Its Mortgage Business. Good. - The Motley Fool

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The ample bank Wells Fargo (WFC 3.25%) precocious announced that it is readying to importantly standard backmost its owe business, a large determination erstwhile you see the slope not agelong agone was the largest owe originator successful the country.

Wells Fargo plans to proceed providing mortgages for existing customers and homebuyers successful number communities. Furthermore, the slope is going to adjacent its third-party mortgage-buying concern successful which it would acquisition mortgages originated by different lenders. The slope is besides readying to merchantability the bulk of its mortgage-servicing business.

The determination is simply a large displacement for CEO Charlie Scharf arsenic helium continues to alteration the bank, but yet 1 that I deliberation is simply a bully determination and that volition presumption Wells Fargo much similar a modern-day bank.

The owe concern is difficult

Wells Fargo is 1 of the fewer large banks that stayed heavy progressive successful the owe concern adjacent aft the fallout from the Great Recession and the subprime owe crisis.

People successful a league country talking.

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In 2021, Wells Fargo was the second-largest owe lender successful the state only behind Rocket Companies, having originated much than $228 cardinal successful volume. The refinancing roar successful 2021 enabled the slope to garner astir $5 cardinal successful owe banking fees, up from conscionable $3.5 cardinal the twelvemonth before.

But the owe concern truly hasn't been charismatic since the Great Recession. Low involvement rates for overmuch of the past decennary marque for bladed margins, but past erstwhile rates emergence it tin depress volume, particularly erstwhile they determination up rapidly arsenic we've seen implicit the past year.

The concern is besides rather cyclical. When conditions were highly fruitful for the owe manufacture successful 2021, galore analysts warned that this could beryllium arsenic bully arsenic it gets, which ever seems to enactment a spot of a unreality implicit the industry.

The owe manufacture is besides precise fragmented, and it's hard for adjacent the apical lenders successful the abstraction to summation capable marketplace stock to truly make a moat. Many would picture mortgages arsenic a commoditized product, truthful it's hard to truly basal out, isolated from the complaint a institution offers. 

While location lending has ever been a staple of the banking industry, astir banks contiguous privation to put their resources into serving customers that they tin make multiproduct oregon beardown deposit relationships with. Mortgage products truly don't execute immoderate of these things oregon make a loyal narration with the customer.

Why this is simply a affirmative determination for Wells Fargo 

It's nary concealed that the modern banking exemplary shifted distant from the owe abstraction to absorption much connected assorted types of commercialized lending, which are higher-yielding loans, galore of which volition set with the national funds rate.

Relationships with commercialized clients besides make stickier, lower-cost deposits due to the fact that the lender volition often archer the lawsuit that to get a indebtedness oregon enactment of recognition they besides request to support their deposits with the bank.

This exemplary has been much palmy implicit the past decade, and the ample banks similar JPMorgan Chase and Bank of America that leaned into this were rewarded with higher valuations.

Wells Fargo already has a premier commercialized lending franchise, and Scharf is simply a Jamie Dimon protégé, truthful it makes consciousness that helium is getting retired of owe lending and investing much successful businesses similar recognition paper lending and concern banking. Ultimately, the strategy should make amended returns.

Bank of America is an advertizing spouse of The Ascent, a Motley Fool company. Wells Fargo is an advertizing spouse of The Ascent, a Motley Fool company. JPMorgan Chase is an advertizing spouse of The Ascent, a Motley Fool company. Bram Berkowitz has positions successful Bank of America. The Motley Fool has positions successful and recommends Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy.