SAN FRANCISCO, Nov. 27 /PRNewswire-FirstCall/ -- Wells Fargo & Company announced today it will further tighten its home equity lending standards and will take a special fourth quarter 2007 provision of $1.4 billion (pre-tax), largely for higher losses it now expects in certain indirect channels through which it no longer is accepting business.
While the Company will remain a leading provider of home equity financing directly to its customers, it decided to stop originating or acquiring new home equity loans through certain indirect channels. Specifically, the Company will no longer originate home equity loans through wholesalers where the combined loan-to-value ratio of the first and second mortgages is 90% or higher, or where the second mortgage is not behind a Wells Fargo first mortgage. Also, as previously announced, the Company is no longer acquiring home equity loans through correspondent relationships, including other financial institutions and other mortgage companies. The portfolios that have been acquired through these indirect channels will be placed in liquidating status under the direction of a dedicated management team.
While the $11.9 billion of loans in this liquidating portfolio constituted only about 3% of Wells Fargo's total loans outstanding as of September 30, 2007, the loans represent the highest risk in the Company's $83.4 billion National Home Equity Group portfolio. They reflect a combination of the most recently originated vintages, with the highest combined loan-to-value ratios, that do not have the added protection of being behind a Wells Fargo first mortgage, and are largely concentrated in a few geographic markets which are experiencing the most abrupt and steepest declines in housing values.
The special provision for the liquidating portfolio reflects the higher losses the Company now expects in this portfolio because of further deterioration in the outlook for the housing market. Losses in this liquidating portfolio are currently expected to total approximately $1 billion over the course of 2008 and 2009 and are expected to diminish over time as the loans are resolved or repaid. The Company expects to apply actual quarterly charge-offs in the liquidating portfolio against the special reserve and, in keeping with the Company's practice, will provide for charge-offs in its continuing lending business to maintain adequate reserve coverage each quarter. The Company expects that its fourth quarter 2007 provision for credit losses will adequately cover all losses inherent in its portfolios, reflecting all charge-offs in the quarter plus the special provision.
"Given today's uniquely challenging environment, we believe that sharpening our focus on our better-performing and relationship-based home equity loans is in the best long-term interest of our company," said John Stumpf, Wells Fargo president and CEO. "Home equity loans remain an important product for our customers. However, given the declining performance of these specific indirect categories of home equity loans, we believe it's prudent to further tighten our standards, to stop acquiring new loans in these segments, and to manage the portfolio as a liquidating, non-strategic asset. We believe that focusing on our customers, remaining 'open for business' in all direct-to-customer channels for consumer and commercial borrowers, and being prepared for opportunities in this challenging environment are the right priorities for Wells Fargo."
According to CFO Howard Atkins, "By focusing on our core customers, Wells Fargo has largely avoided many of the credit and capital market problem areas in the industry. We did not offer consumer loan products that were inconsistent with our responsible lending practices, such as option adjustable rate mortgages (ARMs) and negative amortization ARMs. Below certain credit scores, we did not offer stated income, low, and no documentation mortgages, other than a negligible amount of such loans held in portfolio after September 30, 2007, and we only service these types of loans on behalf of investor partners who have assumed the credit risk. Because of our conservatism, we lost market share in the sub-prime segment the past three years and we're glad we did. We have minimal exposure to collateralized debt obligations. We do not hold in our money market mutual funds any collateralized debt obligations, any commercial paper obligations directly backed by sub-prime debt, or any single-seller commercial paper programs sponsored by mortgage originators. We did not participate in any significant way in any large, leveraged buyouts that were 'covenant lite.' We did not sponsor any 'structured investment vehicles' to hold assets off our balance sheet. We have never made a market in sub-prime mortgage securities. We have minimal direct exposure to hedge funds. Avoiding these problems has enabled us to maintain one of the strongest equity capital positions among large bank holding companies."
The Company also announced today that the staff of the Securities and Exchange Commission has provided guidance to the Visa member banks concerning the accounting for transactions relating to the October 3, 2007 global restructuring of the Visa organization of affiliated companies under a single holding company, Visa Inc., and the members' obligations under various Visa- related litigation matters. Pursuant to the SEC staff's guidance, based on its 5% membership share in Visa USA, and based on indemnification obligations associated with agreements entered into by the Company in the second quarter 2006 and third quarter 2007, the Company will record a litigation liability and corresponding expense of $95 million for second quarter 2006 and $170 million for the third quarter 2007, which will reduce previously reported diluted earnings per share for those periods by $0.02 and $0.04, respectively. The impact to the second quarter 2006 was estimated based upon the Company's share of an actual settlement reached in November 2007. The Company has concluded that these amounts are immaterial to the periods impacted and will reflect the impact of these expenses in future financial filings.
The following appears in accordance with the Private Securities Litigation Reform Act of 1995:
This news release has forward-looking statements about the Company, including statements that:
-- losses in the liquidating portfolio are expected to total approximately $1 billion over the course of 2008 and 2009 and are expected to diminish over time as the loans are resolved or repaid; -- actual quarterly charge-offs in the liquidating portfolio will be applied against the special reserve; -- the Company will continue to provide for charge-offs in its continuing lending business to maintain adequate reserve coverage each quarter; -- the Company expects that its fourth quarter 2007 provision for credit losses will adequately cover all losses inherent in its portfolios, reflecting all charge-offs in the quarter plus the special provision; and -- the Company will record a litigation liability and corresponding expense of $95 million for second quarter 2006 and $170 million for the third quarter 2007 related to the Visa restructuring.
Do not unduly rely on forward-looking statements. They give the Company's expectations about the future and are not guarantees. There is no assurance that actual losses in the liquidating portfolio over the course of 2008 and 2009 will not exceed $1 billion or that the fourth quarter 2007 provision will be sufficient to cover actual losses in the liquidating portfolio and the Company's other loan portfolios. Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update them to reflect changes that occur after that date.
There are a number of factors that could cause results to differ significantly from the Company's expectations, including further deterioration in the credit quality of the liquidating portfolio specifically or the Company's home equity loan portfolios generally, or in the value of the collateral securing those loans, due to higher interest rates, increased unemployment, a decline in home values, or other economic factors. For a discussion of other factors that may cause actual results to differ from expectations, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2006, as updated by the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC and available on the SEC's website at http://www.sec.gov/.
Wells Fargo & Company is a diversified financial services company with $549 billion in assets, providing banking, insurance, investments, mortgage and consumer finance through almost 6,000 stores and the internet (http://wellsfargo.com/) across North America and internationally. Wells Fargo Bank, N.A. is the only bank in the U.S., and one of only two banks worldwide, to have the highest credit rating from both Moody's Investors Service, "Aaa," and Standard & Poor's Ratings Services, "AAA."
