How Wells Fargo’s correspondent exit may impact the mortgage industry

Wells Fargo’s potential exit from the correspondent production channel will be a positive for a mortgage origination business dealing with overcapacity, a Keefe, Bruyette & Woods report said. A mortgage pullback by the large bank was first discussed in a Bloomberg News article.

“Wells Fargo is committed to supporting our customers and communities through our home lending business,” a bank spokesperson said. “Like others in the industry, we’re evaluating the size of our mortgage business to adapt to a dramatically smaller originations market. We’re also continuing to look across the company to prioritize and best position us to serve our customers broadly.”

In the first half of the year, Wells Fargo originated $28.3 billion in the correspondent channel, down 6.2% from $34.5 billion for the same period in 2021. Ironically, the decline in its retail production was much greater, 26.8% to $43.7 billion from $70.5 billion. Over the past five quarters, Wells Fargo had less variation in its correspondent production than for retail.

“Wells Fargo has added stability to the correspondent market by providing consistently competitive pricing and excellent service through good times and bad, going back decades,” said Tina Freeman, managing director at Mortgage Industry Advisory Corp. “While this move will open up opportunities for other correspondent buyers, it could be a significant loss to the industry.”

The bank had a market share of between 5% and 6% in correspondent lending, according to KBW’s estimates.

“Removal of that market share could benefit other big correspondent mortgage originators,” wrote KBW analyst Bose George. “PennyMac Financial is by far the largest correspondent mortgage originator with a 15% market share over the past 12 months. Other top correspondents are AmeriHome (owned by Western Alliance Bancorp) and New Rez/Caliber (Rithm).”

Piper Sandler analysts added Mr. Cooper to the correspondent participants likely to benefit from a Wells Fargo pullout. In the first quarter, pricing competition in this sector caused Mr. Cooper to slow its correspondent purchase program.

“In our view, this is an incremental positive for the mortgage market as it implies a more rapid reduction in mortgage capacity is taking place,” wrote Piper Sandler Managing Directors Kevin Barker and R. Scott Siefers. “Also, this is a positive development for correspondent lenders because it implies the second largest bank participant and formerly the largest correspondent producer is not competing for loans.”

Some lenders have already pulled out of the channel to concentrate on other areas as origination volume declines. Celebrity Home Loans suddenly shut its correspondent unit Cypress Mortgage Capital around Aug. 10. Home Point Capital sold its correspondent unit to Planet Home Loans in April.

Meanwhile, loanDepot, dealing with a $224 million second quarter loss, is exiting the wholesale business. That third party origination channel is dealing with its own price war, led by United Wholesale Mortgage.

If Wells were to follow through, it is the textbook example of the mortgage industry reverting to its mean, said Jeff Mack, chief operating officer and co-founder of Renaissance Home Loans, a south Florida-based lender.

“Losing a prominent investor from the correspondent channel further reduces the competition in a market, which already has a limited number of companies,” Mack said. “Wells Fargo has long been well respected in the space, but as the total addressable market normalizes and we start to see volumes closer to those of the pre-pandemic, many larger companies are being forced to right size quickly.”

However, Wells Fargo also has more stringent approval requirements to become a partner, Mack continued.

“If they do indeed decide to exit the channel, that liquidity could be absorbed by smaller correspondent investors, which could positively impact smaller lenders throughout the country,” Mack said. “Finally, the exit of a major lender from the jumbo market, which is traditionally dominated by banks, could also present an opportunity for smaller lenders.”

But an industry compliance attorney sees darker implications stemming from Wells’ decision to cut back on mortgage, namely overregulation of the business.

“With a leader like Wells Fargo publicly announcing a decrease in their mortgage business, it should clearly signal the industry and government how radically complex the mortgage has become in the last decade,” said Robert Maddox, partner and the practice group chair of the Banking & Financial Services Practice Group at Bradley Arant Boult Cummings. “The irony appears to be that the government and consumer advocates believe they are defenders of the American consumer but what they are actually doing is actually driving banks to reduce their investment in American homeownership.”

On its second quarter earnings call, company executives warned of further staff reductions in Wells Fargo’s mortgage segment, as the company debated reducing its footprint.

The primary reason lenders operate correspondent businesses is to acquire the associated mortgage servicing rights along with the loan.

Wells Fargo serviced $673.8 billion of residential mortgages for investors as of June 30, according to its 10-Q filing. KBW cites an approximately $1 billion number, but that likely includes loans the bank services in its own portfolio.

Ginnie Mae servicing, primarily Federal Housing Administration loans, is believed to make up 10% of the Wells portfolio, KBW said. And if the bank were to exit the correspondent channel, its servicing portfolio would shrink.

George estimated Wells’ portfolio would be $28 billion smaller now if it had gotten out of correspondent by the end of last year.

The FHA origination and servicing business has fewer participants, and right now, those are primarily nonbanks, George pointed out.

“Given that, we believe that if Wells Fargo meaningfully reduces its role in the FHA market, this could lead to less availability and somewhat higher rates in that channel,” George said. “It also points to the ongoing structural challenges in the FHA market, which have been a partial driver of the strong growth in private mortgage insurance.”

It could even further reduce FHA market share. Recently George calculated that the private mortgage insurers (six that currently write business, plus three others that still have policies on their books) have a 55% share of total insurance-in-force at $1.46 trillion as of June 30; FHA has a 45% share at $1.19 trillion. Since the private MIs regained market share dominance in the fourth quarter of 2020, the gap with FHA has widened each period since.

During the second quarter, the six active private MIs did $120.9 billion, up from $104.1 billion in the first quarter but down from $148.56 billion one year prior.

Conforming servicing could also be affected.

“A contraction of the company’s servicing portfolio should make it easier for other holders of [Fannie Mae and Freddie Mac] MSRs to grow more quickly,” George said. “We have seen strong growth of agency MSRs at some agency MBS REITs, primarily Annaly and Two Harbors.”

But it should not meaningfully impact the pricing of conforming MSRs, George added.