Wells Fargo
(
WFC
) is a diversified financial services company headquartered in San
Francisco. It is the fourth largest bank in the US by assets and
the second largest bank by market cap. It is also the second
largest bank in deposits, home mortgage servicing, and debit cards
in the US. Wells Fargo's significant exposure to the US housing
market created a mess during the housing melt down in 2008-09,
whereupon the bank accepted $25 billion from Troubled Asset Relief
Program (TARP).
Most other Wall Street banks experienced similar turbulence
during this period due to mortgage related exposure including
competitors Goldman Sachs (
GS
), JP Morgan (
JPM
), Citigroup (
C
), UBS (
UBS
) and Bank of America (BAC).
The mortgage division is Wells Fargo's largest value driver
constituting nearly 30% of the firm's value. However, a recent
ruling by a Massachusetts court against Wells Fargo in a
foreclosure case indicates a trend that could result in downside to
our
$37.92 Trefis price estimate for Wells Fargo's
stock
.
Wells Fargo's mortgage revenues nearly tripled in 2009 due to an
improvement in the economic environment resulting in lower credit
loses in addition to the acquisition of Wachovia Corporation. In
2009 Wells Fargo's fully repaid the U.S. Treasury's $25
billion Troubled Asset Relief Program (TARP) Capital Purchase
Program (CPP) preferred stock investment, including related
preferred dividends.
Court Ruling Against Wells Fargo in Foreclosure
Case
The highest court in Massachusetts ruled that Wells Fargo &
Co. and U.S. Bancorp could not foreclose on homes where loans were
not repaid over the doubt that home loans were not properly handled
when they were securitized. The court's decision to void the
foreclosure sales of two homes in Springfield came as owners of the
loans couldn't prove that the mortgages had been assigned to them.
Both loans were packaged as mortgage-backed securities and sold to
investors. The poor documentation of mortgage loans made it
difficult to trace ownership and enforce legal issues. ((
Two Banks Lose in Foreclosure Cases
, The Wall Street Journal))
The case has come as a potential blow to Wells Fargo and could
set a precedent for other cases. This could have a large impact as
we estimate mortgage backed securities (MBS) to be about $3
trillion (making up nearly 22% of the total mortgage debt
outstanding in the US, down significantly from 53%, or $7.5
trillion, in 2009). ((Mortgage Debt Outstanding, Federal
Reserve))
It might also lead to fresh claims from mortgage-bond investors
who have earlier accused and even sued servicers for systematically
poor loan documentation.
Potential Downside to Wells Fargo
While Wells Fargo claims that the ruling "does not prevent
foreclosures on loans in securitizations," it could still have
still have serious implication for Wells Fargo. The inability to
foreclose on home loans (nearly 22% of all home loans) could result
in higher credit losses on home mortgage
loans (represented by provisions as % of home mortgage
loans) for Wells Fargo.
We estimate a 1% increase in provisions for credit losses
as a % of home mortgage loans would result in 18% downside to our
price estimate for Wells Fargo stock.
To see the impact of provisions as % of home mortgage loans,
drag the trend lines in the modifiable charts above.
Our
complete analysis of Wells Fargo's stock is
here
.
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