Wells Fargo, once the No. 1 player in mortgages, is stepping back from the housing market

Charles Scharf, chief executive officer of Wells Fargo & Co., listens during a House Financial Services Committee hearing in Washington, D.C., U.S., on Tuesday, March 10, 2020.
Andrew Harrer | Bloomberg | Getty Images

Wells Fargo is stepping back from the multi-trillion dollar market for U.S. mortgages amid regulatory pressure and the impact of higher interest rates.

Instead of its previous goal of reaching as many Americans as possible, the company will now offer home loans only to existing bank and wealth management customers and borrowers in minority communities, CNBC has learned.

The dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and heightened regulatory oversight — both industrywide, and specific to Wells Fargo after its 2016 fake accounts scandal — led to the decision, said consumer lending chief Kleber Santos.

"We are acutely aware of Wells Fargo's history since 2016 and the work we need to do to restore public confidence," Santos said in a phone interview. "As part of that review, we determined that our home lending business was too large, both in terms of overall size and its scope."

It's the latest, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019. Mortgages are by far the biggest category of debt held by Americans, making up 71% of the $16.5 trillion in total household balances. Under Scharf's predecessors, Wells Fargo took pride in its vast share in home loans — it was the country's top lender as recently as 2019, according to industry newsletter Inside Mortgage Finance.

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Third-party loans, servicing

As part of its retrenchment, Wells Fargo is also shuttering its correspondence business that sells mortgages through third-party companies and "significantly" shrinking its mortgage servicing portfolio through asset sales, Santos said.

The correspondence channel is a significant pipeline of business for San Francisco-based Wells Fargo, one that became larger as overall loan activity shrank last year. In October, the bank said 42% of the $21.5 billion in loans it originated in the third quarter were correspondence loans.

The sale of mortgage servicing rights to other industry players will take at least several quarters to complete, depending on market conditions, Santos said. Wells Fargo is the biggest U.S. mortgage servicer, which involves collecting payments from borrowers, with nearly $1 trillion in loans, or 7.3% of the market, as of the third quarter, according to data from Inside Mortgage Finance.

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