Wells Fargo Defends Mortgage Holdings

Wells Fargo management is saying the firm has limited risk to the demands that have spooked bank-stock investors.
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Wells Fargo

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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

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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

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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



Freddie Mac


. 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.

"Therefore we have no repurchase obligation," said Atkins.

The riskiest exposure lies in the 8% of Wells Fargo's servicing portfolio which the bank originated and then sold into private-label securitizations. Roughly 83% of that debt is considered prime and more than half of the loans were originated before 2006. Wells management said problems chiefly occurred in loans originated from 2006 to the middle of 2008.

"Wells Fargo originated the loan and therefore may have some repurchase risk," Atkins acknowledged. But, he said, "most of the repurchase risk we have is with agencies and is essentially concentrated in the 2006 through early 2008 vintages, which for the industry contained a higher concentration of low or no doc and stated income mortgages.... Our repurchase demands from GSEs for these vintages declined now for the second straight quarter, and we don't expect large losses on the pre-2006 or post-2008 vintages."

Read More: Bank of America Shares Fall on Downgrades

As details emerged about Bank of America's private-label MBS woes on Tuesday afternoon, bank stocks began to sell off heavily. The bearishness bled into Wednesday morning, with two analysts downgrading BofA shares. Oppenheimer analyst Chris Kotowski downgraded the stock to "hold," saying he expects more private-investor lawsuits to emerge.

"We expect that private-side put-backs will also be limited and manageable," said Kotowski. "That said, there will be lots of suits with big numbers."

Still, while Bank of America hit fresh lows on Wednesday morning and were still tracking more than 1% lower in recent trading, Wells Fargo shares were climbing 5.5% higher at $25.91 by 1:30 p.m. JPMorgan was up more than 1.1% at $38.11.

-- Written by Lauren Tara LaCapra in New York


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