Wells Fargo warns home mortgage slump to continue

Wells Fargo & Co. leaders cautioned Friday that they don't see a significant bounce back on the horizon for the home lending business that is so important to Des Moines' economy.

The bank disclosed in a quarterly report Friday that its mortgage division earned $324 million from July through September, slightly better than the $283 million it earned from April through June. But, with borrowing rates continuing to rise, the business is well short of how it performed over the last couple of years.

Income in the division for the most recent quarter was down about 75% from the same period last year, when Wells Fargo earned $1.3 billion from home lending. The bank benefitted during the COVID-19 pandemic, as the Federal Reserve maintained borrowing interest rates near 0, helping families refinance or take out loans for new homes.

But even compared to 2019, before the pandemic, Wells Fargo's Des Moines-based home mortgage division is down. The division earned about 30% more in the July-through-September period that year.

More:Wells Fargo cuts more jobs in Des Moines metro in the 10th round of layoffs since April

Chief Financial Officer Mike Santomassimo told analysts during a call Friday morning that he doesn't see the division improving through the end of the year.

“We expect it to remain challenging in the near term, and it’s possible that we have a further decline in mortgage banking revenue in the fourth quarter, when mortgage originations are seasonally slower," he said.

With about 13,000 local workers, Wells Fargo is the top private employer in central Iowa. But the bank has been on a cutting spree this year, laying off about 400 workers since April, according to filings with the state.

Wells Fargo spent about $8.2 billion on personnel in the most recent quarter, down by about $400 million from the same period last year.

"We continue to remove excess capacity to align with the reduced demand and expect these adjustments will continue over the next couple quarters," Santomassimo said of the home mortgage division on Friday.

Overall, Wells Fargo reported about $3.5 billion in net income for the quarter. That's about $400 million more than the previous quarter but about $1.6 billion less than what the company earned during the same time in 2021.

Investors were slightly pleased with the news, sending the stock to $43.17 a share Friday afternoon, up about 2% from where it stood at the end of Thursday. The company reported more revenue but lower earnings per share than analysts' consensus expectation, according to FactSet.

More:Wells Fargo to pay $145 million in settlement over employee retirement funds

Wells Fargo particularly missed earnings expectations because the bank reported a $2 billion loss "related to litigation, customer remediation, and regulatory matters," according to a news release Friday. Regulators continue to scrutinize the bank because of a fraud scandal that came to light in 2016, revealing that employees made fake accounts in customers' names to drive up commissions.

The bank is also under investigation for allegedly conducting fake interviews with minority employees to appear as if the company was trying to diversify its ranks. Some homeowners have also sued the bank this year, writing in a legal complaint that the company's home lending division racially discriminated against applicants. Wells Fargo agreed last month to pay a $145 million settlement after another federal investigation into how employees' retirement accounts were handled, though the bank did not admit wrongdoing.

CEO Charlie Scharf, who took the reigns three years ago, told analysts Friday that the company can only register these kind of operating losses on their quarterly reports when they have a solid idea of how much they will need to pay. He said he couldn't offer guidance about how much more these expenses are going to cost the company in coming months.

“We do have things that will be bumpy, that could be significant," he said. "It’s in our best interest to get as much behind us as quickly as we can. It’s what we’ve been trying to do.”

Prior to Friday's releases, analysts at Bank of America Securities predicted that the country's biggest banks will struggle financially as the impacts of a downturn in the overall economy will lead to less borrowing. On Thursday, the average 30-year-fixed-rate mortgage came with a 6.92% interest rate, a 20-year-high, according to Freddie Mac.

"We expect the damage caused by runaway inflation (and reactionary monetary policy) to weigh on the fundamental growth outlook," the analysts wrote. "This means slowing loan growth, rising credit costs and an eventual peak in net interest margins."

Analysts at Jefferies, meanwhile, noted on Friday that reports from banks like J.P. Morgan, Wells Fargo, Citi and UBS showed that customers didn't spend as much money on credit and debit cards during the summer as they normally do.

During the period of July through September, the analysts wrote, customers normally increase spending compared to the previous quarter. But they found that credit card spending was about 1.8 percentage points lower than they would have expected in a normal year. They found that spending on debit cards was about 1.3 percentage points lower.

They said that Wells Fargo didn't experience as extreme of a drop off. Its customers spent about 2 percentage points more with credit cards than they did the prior quarter, about in line with the company's average for this time of year. Their spending on debit cards, however, were down 2 percentage points.

"Spend in the US is at the early stages of a downtrend," the analysts wrote.

Tyler Jett covers jobs and the economy for the Des Moines Register. Reach him at tjett@registermedia.com, 515-284-8215, or on Twitter at @LetsJett.

This article originally appeared on Des Moines Register: After Iowa layoffs, Wells Fargo warns home mortgage slump to continue