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Wells Fargo is stepping back from mortgages after the Fed's rate hikes helped crater the US housing market

Jan 11, 2023, 23:26 IST
Business Insider
Rising interest rates have hammered the US housing market this year.Getty Images
  • Wells Fargo is retreating from its mortgage business as rising borrowing costs hammer housing demand.
  • The bank will now only offer home loans to existing customers and families from minority communities.
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Wells Fargo is downsizing its mortgage business after the Federal Reserve's outsized interest-rate hikes hammered the housing market by helping dampen demand.

The bank said Tuesday it will now offer home loans only to existing Wells Fargo customers and families from minority communities.

"We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus," Wells Fargo's CEO of consumer lending Kleber Santos said in a company statement.

The bank also said it would shutter its correspondent business, which sells mortgages through third parties, and scale back its servicing portfolio.

Wells Fargo CEO Charlie Scharf in June signaled the bank was reconsidering the size of its home lending business, as rising interest rates led to falling mortgage volumes. That chipped away at the profitability of its mortgages division.

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The Fed raised rates at a historic pace from near-zero in March to their current level around 4.5% in a bid to tame sky-high inflation. The hikes led to an increased cost of borrowing that was reflected in higher mortgage rates, with average 30-year rates moving from below 4% at the start of 2022 to 6.5% as of Wednesday.

Higher mortgage rates are expected to drag significantly on the US housing market, putting off potential buyers as repayment costs rise. Some economists have projected that house prices could fall 20% in 2023 as demand stalls.

While a collapse of that magnitude could frustrate homeowners — as well as banks that finance mortgages like Wells Fargo — analysts see driving down house prices as a key part of the Fed's campaign to lower inflation to its 2% target.

US house prices surged between the start of the pandemic and the end of 2021 as purchasers benefited from ultralow interest rates whose influence helped keep mortgage costs low.

The bubble — along with soaring food and energy prices — helped to drive US inflation to forty-year highs, with the latest reading of the Consumer Price Index in November showing prices are still rising at a rate of 7.1%.

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"The Fed is using the housing market as a fulcrum to slow overall activity and get the inflation rate down," real estate and finance professor Susan Wachter told the Wharton Business Daily radio show Tuesday. "When they succeed in doing that, housing and rents are likely to come down most and fastest, and that may get us out of the inflation bubble sooner than we think in 2023."

Read more: There's more pain to come for Wells Fargo's mortgage business. Here are the 4 main factors driving CEO Charlie Scharf's retreat from home lending.

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