Once the leader in the U.S. mortgage market, banking giant Wells Fargo (NYSE:WFC) announced that it will step back from the housing market amid regulatory pressure and soaring interest rates. Previously, the company forwarded the protocol of reaching as many Americans as possible. Now, the bank will narrow its consumer target focus. WFC stock gained modestly for Wednesday’s late-morning session.
According to a CNBC report, Wells Fargo “…will now focus on home loans for existing bank and wealth management customers and borrowers in minority communities.” Further, the news agency mentioned that the Federal Reserve’s rate-hike directive and long-term profitability concerns of the mortgage business inspired the strategic pivot. As well, heightened regulatory scrutiny of mortgage lending and Wells’ own controversies helped seal the deal.
“We are acutely aware of Wells Fargo’s history since 2016 and the work we need to do to restore public confidence,” said Kleber R. Santos, CEO of Consumer Lending, in a phone interview with CNBC. “As part of that review, we determined that our home-lending business was too large, both in terms of overall size and its scope.”
Per CNBC, it’s the latest and possibly the most significant strategic shift for WFC stock since CEO Charlie Scharf took the helm in late 2019. Previous leadership teams of the company prided themselves in their home-loan market-share dominance. In 2019, it stood as the nation’s top mortgage lender, enjoying $201.8 billion in revenue.
WFC Stock Faces Stiff Headwinds
On the surface, Wells’ fresh directive to focus on existing bank customers and minority communities is a noble one. Nevertheless, WFC stock may face significant headwinds as the underlying company undertakes the strategic shift.
Unfortunately, WFC stock must also rise above the underlying enterprise’s past controversies. In 2012, the U.S. Department of Justice reached a settlement with Wells Fargo regarding discriminatory lending practices.
More recently, Bloomberg reported in March last year that Black homeowners sued Wells for refinance “redlining.” According to Investopedia, redlining is “the discriminatory practice of denying services (typically financial) to residents of certain areas based on their race or ethnicity.”
Therefore, management’s strategic shift may not be enough for WFC stock. It likely must prove intent through action.
Why It Matters
Another challenge that may cloud the upside narrative for WFC stock focuses on reducing the addressable market. As the Washington Post mentioned in 2020, “[t]he affluent are taking advantage of the cheapest mortgage rates in history to buy bigger homes.” However, soaring rates today now means the Fed inherently limited mortgage-lending opportunities.
In other words, the consumers who were able to purchase a home probably did so. Therefore, Wells may incur the challenge of narrowing its already limited prospects, presenting questions for WFC stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.