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TheStreet Open House

Wells Fargo Defends Mortgage Holdings

SAN FRANCISCO (TheStreet) -- Wells Fargo (WFC) outlined just $69 million in repurchases of private-label mortgages last quarter - a surprisingly small figure given the scale of its mortgage operations and the demands other big-bank peers are facing to buy back troubled debt.

Wells also outlined just $3.8 billion in repurchase demands as of Sept. 30 and $1.3 billion in reserves to cover potential liabilities.

By contrast, JPMorgan Chase (JPM) faced $1.5 billion in losses related to repurchases last quarter and boosted reserves by $1 billion to cover near-term losses. Bank of America (BAC) faced nearly $13 billion in repurchase requests last quarter, with $4.4 billion in liabilities, mainly related to loans sold to government-supported enterprises (GSEs) Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). Not included in those statistics is a request from eight private-label investors who demand that BofA buy back $47 billion in mortgage-backed securities.

Read More: Bank of America Eyes Mortgage Buybacks

Read More: Bank of America Drops on Mortgage Buyback Woes

Wells management strived to separate its mortgage business from competitors during its quarterly earnings conference call on Wednesday. First because Wells Fargo doesn't originate most of the legacy mortgages it services and secondly because it has very little exposure to low-quality, private-label debt.

"One of the reasons we are so confident in terms of our risk exposure is we have a very high-quality servicing portfolio," CFO Howard Atkins said. He later added that, "unlike many of the other big bank peers, we didn't do a lot of private-label securitization."

Wells Fargo says it had $3.8 billion in outstanding repurchase demands during the third quarter, related to 16,527 loans. About half of the demands have ended up being repurchased several quarters, according to Atkins. Of those repurchased loans, about 20% to 25% of the borrowers remain current after mortgage modifications. Of the rest, only about half end up defaulting.

According to those calculations, Wells would presumably end up buying $1.9 billion worth of outstanding repurchase requests, with less than $200 million going bad. Atkins indicated that the reserves are "adequate to cover these potential losses."

Perhaps more importantly, Wells Fargo seems to have relatively little exposure to the wildcard of private-label investors who are looking to pass back bad debt to the deep pockets of a big bank.

The majority of Wells Fargo's servicing portfolio relates to loans sold to GSEs, or those held on its own balance sheet. About 6% relates to nonconforming debt that was sold to private investors. Most of those assets are high-quality jumbo loans that Wells Fargo didn't underwrite or securitize, shielding it from liability issues.

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