Wells Fargo's home-loan hegemony spurs stability risk
Wells Fargo & Co.'s grip on the U.S. mortgage market has tripped alarms among regulators and lawmakers concerned that the bank's control over one of every three new loans could hurt consumers and undermine markets.
Wells Fargo and its two largest rivals, JPMorgan Chase & Co. and U.S. Bancorp made half of all U.S. home loans in the first six months, according to Inside Mortgage Finance, an industry publication. Wells Fargo alone controlled 33.1 percent. In mortgage servicing, which involves billing and collections, four firms have 50 percent of the business, and Wells Fargo is No. 1 in that field, too, with 18.5 percent.
The concentration in the mortgage business has drawn warnings from the inspector general for Fannie Mae and Freddie Mac, the head of Ginnie Mae, Fitch Ratings, and congressmen, including one from Wells Fargo's home state, about growing risks to borrowers, taxpayers, investors, housing markets and the financial system. Scenarios include a setback or strategy shift at Wells Fargo that could choke off credit for homebuyers and compel the United States to again pump in money to keep the housing market from seizing up.
"A concentration of issuers creates an oligopoly," said Bill Frey, head of Greenwich Financial Services LLC in Greenwich, Connecticut, whose firm invests in, creates and trades mortgage bonds and advises bondholders. The result will be "higher mortgage costs for generations, as well as slower economic growth. Housing is the keystone of our economy."
As recently as the 1990s, a company with 7 percent market share would have been considered a large player in a market that was broadly distributed among savings and loans, community banks, credit unions, mortgage brokers and commercial banks, according to David Stevens, chief executive officer at the Mortgage Bankers Association and a former official in the U.S. Department of Housing and Urban Development.
Wells Fargo, led by chief executive officer John Stumpf, 58, controlled 15 percent of the market in 2007, before the financial crisis triggered by falling home prices and souring mortgages hobbled rivals such as Bank of America Corp. and Citigroup Inc.
"The nation benefits from a broadly distributed mortgage-finance system," said Stevens, whose organization represents more than 2,400 firms involved in housing. "If the market is too concentrated on one company, and if they were to change their strategy around mortgage originations or got into financial trouble and had to leave the market altogether you could have market disruptions."
Officials aren't suggesting that Wells Fargo did anything improper to emerge as the biggest player in mortgages, or that the San Francisco-based bank, ranked fourth by assets in the United States, is putting its own soundness at risk.
Instead, as they seek to avoid another financial crisis, regulators' focus is on what might happen if Wells Fargo's enthusiasm wanes for housing, which comprised almost a fifth of the U.S. economy in more prosperous years. Last month, the bank said it will stop funding loans originated and sold by independent mortgage brokers.
"The home lending business is a key part of Wells Fargo's strategic vision for the future," Vickee Adams, a bank spokeswoman, said in an emailed statement. "We have always taken a longer-term view of the home lending business and we have succeeded by lending responsibly to customers, one at a time."
Adams said the lender should be judged by its share of the retail channel, 16.3 percent in the first quarter, rather than the entire business, which also involves buying loans from small- and medium-sized lenders. In January, sales managers in the San Francisco Bay Area dressed as cowboys to urge retail loan officers to reach for 40 percent of the new-home purchase market, according to two attendees who asked that their names not be used because they weren't authorized to speak publicly.
Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has said he's concerned about concentration and urged officials in a May speech to consider changes. Freddie Mac with Fannie Mae, the recipients of nearly $190 billion in government aid bought 82 percent of the single-family loans it purchased in 2011 from 10 firms, filings show, with 40 percent from Wells Fargo and JPMorgan.
Fannie Mae and Freddie Mac rely on Wells Fargo and other large servicers to collect payments for the loans they guarantee. That makes them vulnerable to the business practices and financial health of a few large banks, said Steve A. Linick, the Federal Housing Finance Agency's inspector general. The top 10 serviced 75 percent of single-family mortgages guaranteed by Fannie Mae, according to company filings.