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42 | M R EP O RT SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Wells Fargo to Close Correspondent Business, Shrink Mortgage Servicing Portfolio The bank announced it will significantly shrink its mortgage servicing portfolio, revealing the shift will result in a round of layoffs for the bank's mortgage operations. W ells Fargo is step- ping 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 to existing bank and wealth management customers and borrowers in minority com- munities, CNBC has learned. Highlights: » As part of its retrenchment, Wells Fargo is also shuttering its correspondent business that buys loans made by third- party lenders and "significantly" shrinking its mortgage servicing portfolio through asset sales. » Altogether, the shift will result in a fresh round of layoffs for the bank's mortgage op- erations, executives acknowl- edged, but they declined to quantify exactly how many. Dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and questions about the long- term profitability of the business led to the decision, Consumer Lending chief Kleber Santos says. Regulators have heightened oversight of mortgage lending in the past decade, and Wells Fargo garnered further scrutiny after its 2016 fake accounts scandal. "We are acutely aware of Wells Fargo's history since 2016 and the work we need to do to restore public confidence," Santos said. "As part of that review, we determined that our home lending business was too large, both in terms of overall size and its scope." According to experts, it's the latest, and perhaps most sig- nificant, 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 bal- ances. 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, when it had $201.8 billion in volume, according to the industry newsletter Inside Mortgage Finance. As a result of this and other changes that Scharf is making, including pushing for more revenue from investment banking and credit cards, Wells Fargo will more closely resemble megabank rivals Bank of America and JPMorgan Chase. Both companies ceded mortgage share after the 2008 financial crisis. Following those once-huge mortgage players in slimming down their operations has implications for the U.S. mortgage market. As banks stepped back from home loans after the disaster that was the early 2000's housing bubble, nonbank players including Rocket Mortgage quickly filled the void. But these newer players aren't as closely regulated as the banks are, and industry critics say that could expose consumers to pitfalls. Today, Wells Fargo is the third biggest mortgage lender after Rocket and United Wholesale Mortgage. Third-Party Loans, Servicing As part of its retrenchment, Wells Fargo is also shuttering its correspondent business that buys loans made by third-party lend- ers and "significantly" shrinking its mortgage servicing portfolio through asset sales, Santos says. 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 correspon- dence loans. The sale of mortgage servicing rights to other industry players will take at least several quarters to complete, depending on market conditions, Santos says. Wells Fargo is the biggest U.S. mortgage servicer, which involves collecting payments from borrowers, with nearly $1 tril- lion in loans, or 7.3% of the market, as of the third quarter, according to data from Inside Mortgage Finance. More Layoffs Altogether, the shift will result in a fresh round of layoffs for the bank's mortgage operations, executives acknowledged, but they declined to quantify exactly how many. Thousands of mortgage workers were terminated or volun- tarily left the company last year as business declined. The news shouldn't be a complete surprise to investors or employees. Wells Fargo employ- ees have speculated for months about changes coming after Scharf telegraphed his intentions several times in the past year. Bloomberg reported in August that the bank was considering paring back or halting correspondent lending. "It's very different today running a mortgage business inside a bank than it was 15 years ago," Scharf said. "We won't be as large as we were historically" in the industry, he added. Other Changes Wells Fargo said it was invest- ing $100 million towards its goal of minority homeownership and placing more mortgage consultants in branches located in minority communities. "Our priority is to de-risk the place, to focus on serving our own customers and play the role that society expects us to play as it re- lates to the racial homeownership gap," Santos said. The mortgage shift marks what is potentially the last major business change Scharf will undertake after splitting the bank's operations into five divisions, bringing in 12 new operating committee members, and creating a diversity segment. Scharf said that he didn't antici- pate any other major changes, with the caveat that the bank will need to adapt to changing conditions. "Given the quality of the five major businesses across the fran- chise, we think we're positioned to compete against the very best out there and win, whether it's banks, nonbanks, or fintechs," Scharf said.