Wells Fargo & Co. is absorbing $1.4 billion in losses on home equity loans that borrowers have stopped repaying amid a deepening real estate slump that’s turned into a financial sinkhole.
Until Wells Fargo disclosed its projected losses late Tuesday, the San Francisco-based bank had suffered relatively little damage in a mortgage meltdown that had already battered other major U.S. lenders.
“Clearly, this is a disappointment because (Wells) had been seen as better managers of credit than many other big banks,” said RBC Capital Markets analyst Joseph Morford. “But now they have a big blemish on them, too.”
After gaining 34 cents to finish at $29.83 in Tuesday’s regular session, Wells Fargo shares plunged $1.40, or 4.7 percent, in the extended trading that followed a Securities and Exchange Commission filing outlining the bank’s home equity loan losses.
“Maybe people are going to be freaked out about Wells Fargo’s losses, but they shouldn’t be,” said Punk, Ziegel & Co. analyst Richard Bove. “Wells Fargo isn’t superhuman and they made some bad loans just like everyone else.”
Like several of its peers, Wells Fargo will take its lumps in the fourth quarter by recognizing $1.4 billion in losses on a bundle of home equity loans that it intends to sell.
The bank also is retroactively recognizing $265 million in expenses tied to its share of the costs for the $2.25 billion settlement credit and debit card network Visa Inc. reached with American Express Co. earlier this month. Wells Fargo owns a 5 percent stake in Visa.
The legal expenses will trim Wells Fargo’s previously reported earnings for the second quarter of 2006 by 2 cents per share and lop off 4 cents per share from its earnings for its most recent quarter ended in September.
Well Fargo’s troubled home equity loans, totaling $11.9 billion, represent about 14 percent of the bank’s total home equity portfolio of $83.4 billion. The bank has said most of the delinquent loans originated from mortgage brokers or other lenders on the wholesale market.
Wells Fargo is now steering clear of virtually all home equity loans made outside its own offices.
The cautious approach is a stark change from a few years ago when Wells Fargo and other banks sought to cash in on rapidly rising real estate prices by offering teaser rates on mortgages and lowering the bar to qualify for a loan.
Although Wells Fargo has maintained that it imposed higher standards than most other lenders, the bank still got dragged down into the mortgage morass as the sharp decline in real estate prices left borrowers owing more money than their property was worth.
The bleak market conditions has prompted more borrowers to default on their home equity loans, exposing Wells Fargo to hefty losses.
The first hint of Wells Fargo home equity trouble surfaced last month when the bank reported it lost $153 million on the portfolio in the third quarter, from $27 million at the same last year.
Wells Fargo’s chief executive, John Stumpf, spooked investors even further two weeks ago when he described the current real estate slump as the worst since the Great Depression and reiterated earlier projections that the bank’s home equity losses would continue to rise next year.