Wells Fargo takes a hit on loans: $1.4 billion

The bank responded to losses in home equity loans by tightening credit standards and taking a special fourth-quarter charge.

By Mike Meyers, Star Tribune

Last update: November 27, 2007 - 7:43 PM

Worried about the trends in the housing market, Wells Fargo & Co. quit making certain types of home equity loans last summer.

The bank didn't close that lending window fast enough.

Wells Fargo disclosed Tuesday that it would set aside $1.4 billion this quarter as a special charge for rising losses on those equity loans, which were arranged outside the bank by wholesalers and involved situations where the combined total of first and second mortgages came to more than 90 percent of the value of a house.

The loan loss provision is more than triple the $408 million that Wells Fargo charged off for bad mortgage debt -- first and second mortgages -- in the first nine months of 2007.

The news came out after the markets closed, but Wall Street still punished Wells Fargo's stock. The shares ended the day up 34 cents at $29.83, but they fell as far as 4.75 percent to $28.41 in after-hours trading.

The bank said it is no longer making such high loan-to-value equity lines that are not arranged by its employees. Further, it now will require that a Wells Fargo first mortgage be in place before it will finance a second mortgage through a wholesaler.

Wells Fargo also said that it has earmarked $11.9 billion of its riskiest home equity loans -- about 3 percent of total loans outstanding as of Sept. 30, but equal to 14 percent of its total home equity portfolio -- for liquidation. The bank expects to lose about $1 billion on that pool of loans.

"Losses in this liquidating portfolio are currently expected to total approximately $1 billion over the course of 2008 and 2009 and are expected to diminish over time as the loans are resolved or repaid," the bank said in a statement.

Wells Fargo also announced plans to stop originating or acquiring new home equity loans from lending wholesalers that fall short of new, tightened credit standards. The restrictions won't apply to Wells Fargo customers, the bank said in a filing with the U.S. Securities and Exchange Commission.

"Given today's uniquely challenging environment, we believe that sharpening our focus on our better-performing and relationship-based home equity loans is in the best long-term interest of our company," said John Stumpf, Wells Fargo's chief executive.

"Home equity loans remain an important product for our customers," he said. "However, given the declining performance of these specific indirect categories of home equity loans, we believe it's prudent to further tighten our standards, to stop acquiring new loans in these segments and to manage the portfolio as a liquidating, non-strategic asset."

Mike Meyers • 612-673-1746

Mike Meyers • meyers@startribune.com

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