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Wells Fargo to Take Special Provision of $1.4 Billion to Bolster Reserves, Primarily for Home Equity Losses From Certain Discontinued Indirect Channels
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Wells Fargo & Company (NYSE: WFC) announced it will further tighten its home equity lending standards and will take a special fourth quarter 2007 provision of $1.4 billion (pre-tax), largely for higher losses it now expects in certain indirect channels through which it no longer is accepting business.
While the Company will remain a leading provider of home equity financing directly to its customers, it decided to stop originating or acquiring new home equity loans through certain indirect channels. Specifically, the Company will no longer originate home equity loans through wholesalers where the combined loan-to-value ratio of the first and second mortgages is 90% or higher, or where the second mortgage is not behind a Wells Fargo first mortgage. Also, as previously announced, the Company is no longer acquiring home equity loans through correspondent relationships, including other financial institutions and other mortgage companies. The portfolios that have been acquired through these indirect channels will be placed in liquidating status under the direction of a dedicated management team.
While the $11.9 billion of loans in this liquidating portfolio constituted only about 3% of Wells Fargo's total loans outstanding as of September 30, 2007, the loans represent the highest risk in the Company's $83.4 billion National Home Equity Group portfolio. They reflect a combination of the most recently originated vintages, with the highest combined loan-to-value ratios, that do not have the added protection of being behind a Wells Fargo first mortgage, and are largely concentrated in a few geographic markets which are experiencing the most abrupt and steepest declines in housing values.
The special provision for the liquidating portfolio reflects the higher losses the Company now expects in this portfolio because of further deterioration in the outlook for the housing market. Losses in this liquidating portfolio are currently expected to total approximately $1 billion over the course of 2008 and 2009 and are expected to diminish over time as the loans are resolved or repaid. The Company expects to apply actual quarterly charge-offs in the liquidating portfolio against the special reserve and, in keeping with the Company's practice, will provide for charge-offs in its continuing lending business to maintain adequate reserve coverage each quarter. The Company expects that its fourth quarter 2007 provision for credit losses will adequately cover all losses inherent in its portfolios, reflecting all charge-offs in the quarter plus the special provision.
"Given today's uniquely challenging environment, we believe that sharpening our focus on our better-performing and relationship-based home equity loans is in the best long-term interest of our company," said John Stumpf, Wells Fargo president and CEO. "Home equity loans remain an important product for our customers. However, given the declining performance of these specific indirect categories of home equity loans, we believe it's prudent to further tighten our standards, to stop acquiring new loans in these segments, and to manage the portfolio as a liquidating, non-strategic asset. We believe that focusing on our customers, remaining 'open for business' in all direct-to-customer channels for consumer and commercial borrowers, and being prepared for opportunities in this challenging environment are the right priorities for Wells Fargo."
According to CFO Howard Atkins, "By focusing on our core customers, Wells Fargo has largely avoided many of the credit and capital market problem areas in the industry. We did not offer consumer loan products that were inconsistent with our responsible lending practices, such as option adjustable rate mortgages (ARMs) and negative amortization ARMs. Below certain credit scores, we did not offer stated income, low, and no documentation mortgages, other than a negligible amount of such loans held in portfolio after September 30, 2007, and we only service these types of loans on behalf of investor partners who have assumed the credit risk. Because of our conservatism, we lost market share in the sub-prime segment the past three years and we're glad we did. We have minimal exposure to collateralized debt obligations. We do not hold in our money market mutual funds any collateralized debt obligations, any commercial paper obligations directly backed by sub-prime debt, or any single-seller commercial paper programs sponsored by mortgage originators. We did not participate in any significant way in any large, leveraged buyouts that were 'covenant lite.' We did not sponsor any 'structured investment vehicles' to hold assets off our balance sheet. We have never made a market in sub-prime mortgage securities. We have minimal direct exposure to hedge funds. Avoiding these problems has enabled us to maintain one of the strongest equity capital positions among large bank holding companies."
Wells Fargo & Company is a diversified financial services company with $549 billion in assets, providing banking, insurance, investments, mortgage and consumer finance through almost 6,000 stores and the internet across North America and internationally. Wells Fargo Bank, N.A. is the only bank in the U.S., and one of only two banks worldwide, to have the highest credit rating from both Moody's Investors Service, "Aaa," and Standard & Poor's Ratings Services, "AAA."
For more information, visit http://wellsfargo.com.