Wells to take $1.4-billion write-down

NEW YORK — Wells Fargo & Co., the second-largest U.S. mortgage lender, said Tuesday that it would take a $1.4-billion fourth-quarter charge largely related to losses on home equity loans as the nation’s housing market deteriorates.

The company, the fifth-largest U.S. bank, said it also was significantly scaling back making home equity loans through brokers, citing a need to tighten standards and reduced demand from investors seeking to buy the loans.

Wells Fargo had said in July that it would stop making sub-prime home loans, which go to people with weaker credit, through brokers.

Shares of Wells Fargo fell 4.3% in after-hours trading, dropping $1.28 to $28.55. They had closed up 34 cents before the announcement in regular trading.

The pretax 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.

“If Wells is taking this big a write-off, others will need even more serious write-offs,” said David Olson, co-founder of Wholesale Access, a mortgage industry tracking firm in Columbia, Md.

Rising delinquencies and defaults limited profit growth at San Francisco-based Wells Fargo to 4% in the third quarter, the slowest in more than six years, though net income was a record $2.28 billion.

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 to total $1 billion over 2008 and 2009, and to fall over time as loans are repaid.

The $11.9 billion represents about 14% of the $83.4 billion of home equity loans in Wells Fargo’s portfolio, and about 3% of total loans outstanding as of Sept. 30. Wells Fargo said it expected the $1.4-billion charge to “adequately cover all losses inherent in its portfolios.”

Analysts, on average, expected the bank to earn 68 cents a share in the fourth quarter, Reuters Estimates said. The charge equals about two-fifths of Wells Fargo’s pretax profit in the third quarter, when net credit losses rose 35% 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.”

Other banks that announced mortgage-related write-downs of $1 billion or more this month include Citigroup Inc., Bank of America Corp. and Wachovia Corp.

Wells Fargo will stop making home equity loans through brokers when the combined loan-to-value ratio of the first and second mortgages is at least 90%, or when it has not already issued the first mortgages. The bank will continue to offer its own, traditional prime mortgages.

Separately, Wells Fargo will reduce previously reported per-share profit 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 card network.