We recently discussed the potential risk to
) mortgage business from recent court rulings regarding home
Wells Fargo Mortgage Business Could Hit a Snag On
Foreclosure Court Rulings
). Wells Fargo 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 U.S., and it competes with other banks like Bank of
), Goldman Sachs (
), JP Morgan (
), Citigroup (
) and UBS (UBS).
Below we revisit our assumptions and assess the downside
scenario for Wells Fargo's mortgage unit. We estimate that
the mortgage division is Wells Fargo's largest value driver
constituting nearly 30% of the
$33.81 Trefis price estimate for Wells Fargo's
, which is just around 4% ahead of the current market price.
Decline in Home Mortgage Originations
In its latest earning release, Wells Fargo reported a 2.5%
decline in average outstanding balance on home mortgage loans in
2010. The decline was driven by lower home mortgage origination in
the US which fell by 36% to $1.5 trillion during the year. While
refinancing loans declined from $1.3 trillion in 2009 to just over
$1 trillion in 2010, loans for home purchases declined more than
32% to $473 billion in 2010.
The forecasts for originations in 2011 are expected to decline
even further as interest rates start to rise. Home mortgage
refinancing - which typically only picks up only when interest
rates fall - is expected to decline 66% in 2011 with total
originations falling below $1 trillion.
Fewer originations will lead to a decline in average home
mortgage loan outstanding as outstanding loans get repaid with the
improvement in economic environment while fewer new loans /
refinancing are originated as consumers remain cautious.
A decline in the home mortgage originations will directly impact
the net gains from mortgage originations (a non-interest based
revenue for Wells Fargo) and could add some downside pressure to
the stock. If origination volumes stayed flat at 2010 levels for
2011 and then slowly gradually started to increase as depicted
above this would subtract about 1-2% of stock value.
To see the impact of Wells Fargo's home mortgage originations
on the stock estimate drag the trend line in the modifiable chart
above or to see other key units to WFC stock, scroll through the
complete analysis of Wells Fargo's stock