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Wells Fargo & Company (WFC - Analyst Report) plans to terminate 8 mortgage joint ventures (JVs) including an alliance with HomeServices Lending, an affiliate of Berkshire Hathaway Inc. (BRK.A - Snapshot Report) (BRK.B - Analyst Report). The move is part of the largest U.S. mortgage lender’s attempt to adjust to changes in the regulatory environment.
The termination, which is expected to result in 300 job cuts, will close in the next one and a half years. Additionally, on completion, Wells Fargo’s partners may seek to directly finance homeowners, sign agreements to make the bank a preferred lender, or exit the market.
The 8 JVs are Bankers Funding, Colorado Mortgage Alliance, DE Capital Mortgage, HomeServices Lending, Military Family Home Loans, Prosperity Mortgage (a JV with real estate firm Long & Foster), Premia Mortgage and Private Mortgage Advisors.
Among these, HomeServices of America Inc. – the real estate brokerage unit of Berkshire Hathaway – has agreed to take over Wells Fargo’s stake in HomeServices Lending, which was the largest JV.
Why Exit The Mortgage JV?
Wells Fargo’s decision to exit the JVs follows the U.S. government’s increased scrutiny of mortgage lenders after the 2007 mortgage crisis that led to the collapse of the United States housing sector. Moreover, the mortgage industry has been embroiled in legal conflicts with authorities regarding their risky dealings.
Additionally, The Dodd-Frank Act worsened the scenario. Under this act, the JVs could be subject to state regulation, in addition to the current federal regulations. This will likely result in new licensing agreements and additional complexities that could increase compliance costs.
Moreover, the lucrative U.S. home-loan business has started to wane, given the weakening of the refinancing boom and rising long-term interest rates. Notably, the average fixed rate on a 30-year home loan increased almost 100 basis points to 4.31% in the last 3 months.
Like most of its peers, Wells Fargo experienced declining volumes in its home loan business. Notably, income from mortgages was down 3% to $2.8 billion in the second quarter when compared with the prior-year quarter figure.
With a constantly changing regulatory landscape and a volatile macro economy, many banks are revising their business models to maximize profitability. A couple of years ago, Wells Fargo had more than 80 JVs. The bank closed all of them, except for the aforementioned 8, which accounted for the maximum share of the JV loan volumes.
Further, Wells Fargo has been aggressively seeking cost cuts and plans to exit troubled businesses, which entail legal or regulatory risks.
Wells Fargo currently carries a Zacks Rank #2 (Buy). Other stocks that are performing well include KeyCorp. (KEY - Analyst Report) and State Street Corporation (STT - Analyst Report). Both these stocks have the same Zacks rank as Wells Fargo.