Wells Fargo made $131 billion in new home loans during the second quarter,… (CX Matiash, Associated…)
Wells Fargo & Co.'s 17% jump in second-quarter profit reflects its emphasis on Main Street lending, with commercial and consumer loans edging higher and the lowest mortgage rates in history stuffing its pipeline of pending home loans to near bursting.
"Mortgage volumes have been much stronger than anyone expected," Wells Chief Executive John Stumpf said Friday, reporting that Wells made $131 billion in new home loans during the quarter. That's more than twice the amount a year earlier and up 2% from the booming first quarter.
Driven by demand for 30-year loans, mortgage applications are at an all-time high at the San Francisco bank. It closed the quarter with $102 billion in home loans in the pipeline — up from $79 billion at the end of the first quarter and the second-highest level Wells has ever reported.
All told, Wells earned $4.6 billion, or 82 cents per share, during the second quarter, up from $3.9 billion, or 70 cents, a year earlier. Revenue rose to $21.3 billion from $20.4 billion, and Wall Street applauded the solid results by sending the bank's shares higher by $1.02, or 3%, to $33.87.
Yet there is a downside to the emphasis on mortgages at Wells Fargo, which has become by far the largest home lender since the financial crisis.
The bank said it added $669 million during the quarter to its reserves for mortgage repurchases, compared with $242 million a year earlier. Chief Financial Officer Tim Sloan expects another surge in demand that Wells buy back loans it sold in 2006 through 2008 to government-supported finance giants Fannie Mae and Freddie Mac.
Wells said the amount it set aside to fight and settle lawsuits — a sum never disclosed precisely by banks — caused its tally of losses on various business operations to increase from $477 million in the first quarter to $524 million in the second.
The litigation accruals included $175 million to settle a Justice Department lawsuit alleging that Latinos and African Americans were overcharged for mortgages and improperly steered into high-cost subprime loans by independent brokers originating Wells Fargo loans.
In announcing the settlement Thursday, Wells Fargo denied wrongdoing and said it simply wished to avoid prolonged litigation with the government. The bank also announced it would no longer employ brokers to make mortgages, a channel that had constituted 5% of its home-loan volume.
But another aspect of the investigation, lending to minorities by retail employees working directly for Wells, is unresolved. The bank must provide a list by late August of black and Latino borrowers who, according to the Justice Department's statistical model, wound up with subprime loans when they might have qualified for better prime mortgages.
Thomas Perez, head of the department's civil rights division, estimated the list could contain 3,000 to 4,000 names. If that number of borrowers were compensated at the same level as the victims in the broker channel, it could cost Wells Fargo an additional $45 million to $60 million.
Sloan said in an interview that the bank had "no idea" how many minority borrowers would be identified.
Sloan hotly disputed a government claim that African Americans in the retail channel received subprime home loans at twice the rate for white borrowers even after accounting for credit histories, size of down payments, debt burdens and other individual factors.
"That's what the DOJ said, but it's just not accurate," he said.
Sloan said Wells, not burdened by the trading losses suffered by Wall Street-oriented banks such as JPMorgan Chase & Co., more closely tracks the fortunes of the Main Street economy.
Increases in business usage of credit lines and consumer demand for credit cards and auto loans have been encouraging, he said, although those trends slowed halfway through the last quarter.
"The economic numbers are frustrating for everyone. One week it's positive news and the next week negative," he said. "But when you step back a bit you see that overall the economy is growing — it's just growing slowly."