Wells Fargo & Company
) plans to terminate 8 mortgage joint ventures (JVs) including an
alliance with HomeServices Lending, an affiliate of
Berkshire Hathaway Inc.
). The move is part of the largest U.S. mortgage lender's attempt
to adjust to changes in the regulatory environment.
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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
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
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
Further, Wells Fargo has been aggressively seeking cost cuts and
plans to exit troubled businesses, which entail legal or
Wells Fargo currently carries a Zacks Rank #2 (Buy). Other stocks
that are performing well include
State Street Corporation
). Both these stocks have the same Zacks rank as Wells Fargo.