by Jeff Reeves | August 23, 2012 12:11 pm
Wells Fargo (NYSE:WFC) commands one in three U.S. mortgages — and that has some industry watchdogs worried that the bank is treading once again into Too Big to Fail territory.
To be clear, Wells has seen no signs of distress. The company continues to improve its lending operations in the wake of the mortgage meltdown, with total loans increasing slightly year-over-year to $775.2 billion in the latest quarter.
With its loan book growing modestly and its mortgage business showing momentum, many investors are actually pretty pleased with WFC. Especially when you consider that the stock is back to pre-Lehman valuations while stocks like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are both down over 80%.
But while the growth is nice now — with Wells Fargo stock up over 45% year-to-date to outperform BofA, Citi and JP Morgan Chase (NYSE:JPM) significantly — it could be a big problem if things sour again for the housing market.
To that end, Wells issued a two-page, unsigned document to mortgage employees amid “discussion about Wells Fargo’s prominence” in the market. In a nutshell, the note said that Wells became the 900-pound gorilla of home lending due to its own skill and hard work.
“In a free economy, competition is essential,” the bank said. “We believe customers must have choices in where they bring their lending business.”
In other words, we’re big because borrowers like us.
But regulators and lawmakers have said that Wells Fargo’s control of mortgage lending and servicing could hurt consumers and undermine markets. A strategy shift towards more stringent lending guidelines could choke off credit for consumers. And despite the claim of a competitive market, it’s hard to argue that a grab for higher interest rates to juice profits would significantly increase the cost of borrowing across the board when Wells Fargo has a third of the market.
And let’s not even talk about what may happen if there’s a double dip in housing that puts these recent borrowers underwater significantly or results in an uptick in foreclosures. It’s true that we have seen big signs of strength in housing and that we are at or near the bottom, but never say never.
The bottom line for investors is that its unlikely WFC will grow its footprint thanks to its current dominance and the risk of irritating regulators. But if a housing recovery holds, this big mortgage business could deliver big profits for Wells Fargo in the long term as mortgage lending picks up and higher rates deliver higher returns to lenders.
Just beware that there is risk to that huge market share — and that after the financial crisis, critics are not going to let Wells Fargo quietly dominate the mortgage market without any complaints.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
Source URL: http://investorplace.com/2012/08/wells-fargo-too-big-to-fail-the-sequel/
Short URL: http://investorplace.com/?p=220495
Copyright ©2013 InvestorPlace Media, LLC. All rights reserved. 700 Indian Springs Drive, Lancaster, PA 17601.