Wells Fargo Hit by Credit Woes

Wells Fargo(WFC) slid 4% in early trading after the big lender missed analysts' expectations over writedowns on mortgage securities and steep credit losses primarily related to home equity loans.

For the three months ending Sept. 30, the San Francisco bank reported net income of $2.28 billion, or 68 cents a share, compared to $2.19 billion, or 64 cents a share, in the third quarter of 2006. Revenue rose 10% to $9.85 billion.

Analysts had expected Wells Fargo would make 70 cents a share on $10 billion of revenue.

Wells Fargo took a $490 million writedown in its net mortgage loan origination/sales activities gains reflecting a writedown of the mortgage warehouse due to the non-agency mortgage securities markets seizing up this summer. The writedown also includes losses related to mortgage loans repurchased in the quarter and an increase in the repurchase reserve for projected early payment defaults, it said.

Mortgage originations at Wells Fargo dropped 12% from a year earlier to $68 billion. Wells Fargo said that mortgage applications in the pipeline fell 18% to $45 billion. The bank's home equity portfolio rose 7% to $83 billion; however it also had significantly higher credit losses as a result of declining home values, it said.

The bank posted net credit losses of $892 million, 24% higher from the second quarter and 35% higher from the year-earlier quarter. The rise in bad loans was concentrated mostly in Wells Fargo's home equity portfolio, "where losses accelerated in the quarter given the steeper than anticipated decline in national home prices," said Mike Loughlin, its chief credit officer.