One out of every three home loans in the US is now funded by Wells Fargo.
The company scaled back its subprime lending in 2004, well before the housing crash. That move, and the bank’s lack of exposure to investment banking and Europe, is why Wells Fargo was the one major US bank to escape a ratings cut by Moody’s Investors Service this week.
But former regulators and banking experts are worried that the fourth-largest US bank may be becoming over-exposed to the housing market.
It is adding mortgages to its books when the economy is sluggish and interest rates are near record lows, and this could be the best scenario.
If the economy strengthens and rates suddenly rise, mortgages will suffer more than most other loans and the bank’s income could be clobbered. Another recession would also hurt the bank, because defaults would rise.
Wells Fargo says it can manage the risk and sees no reason to stop expanding.
It is hiring thousands of loan processors, underwriters and call center employees, and investing billions of dollars in new loans and tens of millions in the infrastructure to manage them.
Investors have long praised Wells Fargo for sticking to traditional commercial and consumer banking while de-emphasizing riskier undertakings like credit derivatives trading.
But old-fashioned banking can be risky too. By expanding so much in the mortgage industry, Wells Fargo is building a potentially dangerous concentration in one type of loan, said Mark Williams, a former US Federal Reserve bank examiner.
Copyright 2010 Thomson Reuters. Click For Restrictions
Wells Fargo, MoodyвЂ™s Investors Service, investment banking, US bank, home loans