(Adds CEO and analyst comments, background, byline)
By Jonathan Stempel
NEW YORK Nov 27 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
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
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
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
(Reporting by Jonathan Stempel; Editing by Jeffrey Benkoe,
Carol Bishopric, Toni Reinhold)