Sub-prime risk is less for big banks

Times Staff Writer

Wells Fargo & Co. is one of the biggest players in the sub-prime lending business -- but you won’t find the San Francisco bank on the list of companies torpedoed by soured loans.

Like other big banks and lenders, Wells Fargo’s exposure to sub-prime losses is offset by its large portfolio of other loans and businesses. That broader base should enable it and other diversified mortgage companies to continue offering these high-cost loans to borrowers with credit problems or unreliable income, even as other lenders collapse.

“We believe it is very important to offer non-prime loans and are committed to doing so in a responsible way,” Wells Fargo spokeswoman Theresa A. Schrettenbrunner said. “Some borrowers simply need a non-prime loan to get started.”

Not that Wells Fargo isn’t feeling some pain. The company said last week that it had told about 500 workers in its sub-prime operations that they would be laid off unless the bank can find new jobs for them. The downsizing plan came after the company tightened lending standards, leading to a sharp decline in loan volume.

But the woes of the sub-prime industry have barely dented Wells shares, which closed Friday at $34.96, down 1.6% on the year. By comparison, more than two dozen lenders that focused on the sub-prime market have been pushed into bankruptcy, forced to close or sold to other companies.


Shares of New Century Financial Corp. of Irvine, once the nation’s largest independent sub-prime lender, have plunged 93.6% this year, closing Friday at $2 in the over-the-counter market.

Wells Fargo has largely escaped such turmoil by taking steps to minimize its risk from defaults, despite the huge volume of sub-prime loans it generates. Last year, Wells helped originate $83.2 billion in sub-prime or alt-A (a category between sub-prime and prime) loans, or 21% of its mortgage production.

But on most of the sub-prime loans, it kept only servicing rights -- the specialized business of collecting payments from high-risk borrowers -- while Wall Street firms wound up with the loans and the risk of losses on missed payments.

In only 8% of its mortgage originations last year did Wells wind up with exposure to credit losses on sub-prime loans, the company said.

Wells was also protected by measures it adopted under pressure from fair-lending advocates.

Wells Fargo Financial, a sub-prime unit that offers mortgages, credit cards, auto loans and other products, had been accused of using deceptive practices against its customers, many of whom live in lower-income areas.

In response, the company adopted a series of “best practices” over the last two years to provide more safeguards for borrowers. Having those standards in place helped keep Wells Fargo from making some of the riskier loans that have backfired on other lenders, Schrettenbrunner said.

Analyst Richard X. Bove at Punk, Ziegel & Co. said Wells’ books nevertheless show signs of losses on sub-prime loans and the likelihood of more to come.

Overall mortgage losses are rising at Wells, while the yield on its portfolio of retained mortgages is well over 7% -- two percentage points higher than at Bank of America and a level achievable only with high exposure to sub-prime mortgages, Bove said.

Bove said the bank manages its risks so well, however, that other factors probably will offset sub-prime losses. For example, he said, the bank has established large reserves to offset the losses its loan-servicing business suffers when homeowners refinance, paying off their old loans.

Now that home prices have leveled off and lending standards have tightened, there will be far fewer refinances, so Wells can release a flood of these reserves to cancel out the damage from sub-prime.

At the same time, Bove and other analysts say it is hard to get a full picture of Wells’ exposure to the mortgage meltdown. The company buries details about its sub-prime losses amid overall lending statistics, making it hard to compare it with other big sub-prime lenders, said Frederick Cannon, an analyst at Keefe, Bruyette & Woods.

“Wells Fargo’s disclosures are extremely limited,” Cannon said. As an example, he said Wells doesn’t disclose how much interest it retains in loans that are turned into mortgage securities.

Washington Mutual Inc. and Countrywide Financial Corp., which like Wells are major mortgage lenders with big sidelines in sub-prime, are also expected to weather the sub-prime storm -- but perhaps with a few more leaks. Both are less diversified than Wells and until recently offered riskier products, such as 100% financing to borrowers with poor credit scores who didn’t document their earnings.

Washington Mutual has seen its shares fall more than 7% this year, to $42.21 on Friday, largely because of problems at sub-prime unit Long Beach Mortgage, which accounted for an estimated 9% of WaMu’s mortgage production in 2005 and 2006.

Sub-prime loans on which payments had stopped jumped 47% last year, and the number written off as uncollectible rocketed 185%. Most Long Beach borrowers last year were qualified based on the initial low teaser rate on adjustable mortgages, not the fully adjusted interest that kicks in later, Credit Suisse analyst Moshe Orenbuch said.

Bank regulators have moved to ban this practice because of the higher risk of foreclosure.

Calabasas-based Countrywide, where sub-prime lending also accounted for about 9% of total mortgages, has suffered a stock decline of more than 13% this year, to $36.83 on Friday.

Countrywide said defaults on sub-prime loans it made last year may exceed the record set in 2000, when 10% of its loans wound up in foreclosure.

“We believe that declining home prices and other factors ... may produce foreclosure numbers on 2006 originations approaching or exceeding those on loans originated in 2000,” Sandor E. Samuels, the company’s executive managing director, said during a Senate Banking Committee hearing Thursday.

For more stories on the mortgage meltdown, see