NEW YORK ( TheStreet) -- Wells Fargo (WFC) investors beware: The bank's biggest issues don't involve accounting gimmicks or trillions of dollars in hidden risky bets. Instead, they are the same earnings time bomb that has everyone from regional lenders to Wall Street titans worried: Interest rates and the prospect a mortgage refinancing boom fizzles in early 2013.
Although a recent The Atlantic magazine article attempts to paint a picture of hidden mischief scattered throughout the bank's financial statements, investors should only really care about a Federal Reserve-fueled interest rate quandary that Wells Fargo faces this year and beyond. In fact, understanding Wells Fargo's earnings illustrates why the bank isn't the financial bogeyman some in the media might make it seem.
The core dilemma for Wells Fargo headed into the fourth quarter is whether fees the bank collects for underwriting and refinancing mortgages, in addition to other types of loans, will be able to offset a foreseeable decline in interest-based earnings, on the heels a third round of Federal Reserve easing unleashed in September that targeted the mortgage market.
In the wake of the Fed's intervention -- which sets a target of $40 billion a month in mortgage asset purchases -- rates offered by Freddie Mac and Fannie Mae have fallen to or near record low levels. Those low rates cast doubt on the spread between what Wells Fargo's earns on mortgages it owns and what it costs to fund the loans -- a business that often accounts for 50% of the bank's overall revenue.On the flipside of the coin, record low rates have bolstered Wells Fargo's fee-based mortgage refinancing activity, which accounts for a big chunk of its remaining revenue and helped the bank to steady earnings growth in 2012. The challenge for Wells Fargo, as TheStreet noted in September, is that a government-supported refinancing boom may peter out well before interest rates -- and spreads -- rise, putting the bank's impressive earnings growth at risk starting this year. In the third quarter, a troubling interplay between interest-rate based earnings
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV