Wells Fargo Mortgage Origination Faces Headwinds From Higher Rates

By Trefis Team,

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We recently discussed the potential risk to Wells Fargo's ( WFC ) mortgage business from recent court rulings regarding home foreclosures (see 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 America ( BAC ), Goldman Sachs ( GS ), JP Morgan ( JPM ), Citigroup ( C ) 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 stock , 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 slideshow below.

See the complete analysis of Wells Fargo's stock .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: BAC , C , GS , JPM , WFC

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