UPDATE 2-Wells Fargo to take $1.4 bln charge for bad loans

Tue Nov 27, 2007 6:53pm EST

(Adds CEO and analyst comments, background, byline)

By Jonathan Stempel

NEW YORK Nov 27 (Reuters) - Wells Fargo & Co (WFC.N), the second-largest U.S. mortgage lender, said on Tuesday it would take a $1.4 billion fourth-quarter charge largely related to losses on home equity loans as the nation's housing market deteriorates.

The company, which is also the fifth-largest U.S. bank, said it also was significantly scaling back making home equity loans through brokers, citing a need to tighten lending standards and reduced demand from investors to buy the loans.

Wells Fargo had said in July it would stop making subprime home loans, which go to people with weaker credit, through brokers.

Shares of Wells Fargo fell 4.3 percent in after-hours electronic trading, dropping $1.28 to $28.55. They had closed up 34 cents in regular trading on the New York Stock Exchange.

The pre-tax charge shows how the housing downturn affects even lenders with relatively prudent underwriting standards. Analysts have viewed Wells Fargo as among the industry's best at managing risk, and the company never made many of the exotic mortgages that led to soaring defaults among borrowers.

"Wells is one of the most conservative and strongest lenders," said David Olson, co-founder of Wholesale Access, a Columbia, Maryland firm that tracks the mortgage industry. "If Wells is taking this big a writeoff, others will need even more serious writeoffs."

Rising delinquencies and defaults limited profit growth at San Francisco-based Wells Fargo to 4 percent in the third quarter, the slowest in more than six years, though net income was a record $2.28 billion.

GREAT DEPRESSION REVISITED

Wells Fargo said it would put its riskiest $11.9 billion of home equity loans into a "special liquidating portfolio." It expects losses in this portfolio will total $1 billion over 2008 and 2009, and decline over time as loans are repaid.

The $11.9 billion represents about 14 percent of the $83.4 billion of home equity loans in Wells Fargo's portfolio, and about 3 percent of total loans outstanding as of Sept. 30. Wells Fargo said it expects the $1.4 billion charge to "adequately cover all losses inherent in its portfolios."

Analysts, on average, expected the bank to earn 68 cents per share in the fourth quarter, according to Reuters Estimates. The charge equals roughly two-fifths of Wells Fargo's pre-tax profit in the third quarter, when net credit losses rose 35 percent to $892 million.

Wells Fargo announced the write-down after Chief Executive John Stumpf projected in a Nov. 15 presentation "elevated" home equity loan losses into 2008.

Lamenting that "we have not seen a nationwide decline in housing like this since the Great Depression," he said: "I don't think we're in the ninth inning of unwinding this. If we are, it's an extra-inning game."

Other banks to announce mortgage-related write-downs of $1 billion or more this month include Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Wachovia Corp WB.N.

HOME EQUITY CUTBACKS

Wells Fargo will stop making home equity loans through brokers where the combined loan-to-value ratio of the first and second mortgages is at least 90 percent, or where it does not already issue the first mortgages. The bank will continue to offer its own, traditional prime mortgages.

"Home equity loans remain an important product for our customers," Stumpf said in a statement. "Given the declining performance of these specific indirect categories of home equity loans, we believe it's prudent to further tighten our standards." He called the $11.9 billion run-off portfolio a "liquidating, non-strategic asset."

Olson, from Wholesale Access, said: "Real estate values will likely plummet in 2008 and 2009. You don't want any high LTV loans in your portfolio because you'll be under water."

Executives at Wells Fargo were not immediately available for further comment.

Separately, Wells Fargo will reduce previously reported profit per share by 2 cents for the second quarter of 2006 and 4 cents for the third quarter of 2007, reflecting its share of litigation and other expenses related to Visa Inc, the credit card network. (Reporting by Jonathan Stempel; Editing by Jeffrey Benkoe, Carol Bishopric, Toni Reinhold)