Wells Fargo's Servicing Fees Top $1 billion in 4Q

Wells Fargo & Co. kept is earnings growth streak alive in 2006, but with little help from the company's mortgage unit in the fourth quarter. The mortgage unit weakness came in spite of Wells posting more than $1 billion in servicing fee income.

And Wells Fargo's results may be an early harbinger of industrywide troubles in the mortgage sector due to economic conditions that have persisted into the new year.

While Wells reported a corporatewide revenue increase of 8% in 2006, the home loan unit saw its revenue contribution fall to $4.2 billion from $4.9 billion in 2005. Meanwhile, revenue from the rest of Wells Fargo increased 12% last year, with almost all business lines other than home loans producing double-digit revenue growth.

But even as the Wells Fargo home loan and home-equity unit posted disappointing financial results, it continued to pick up market share in the competitive mortgage lending arena. Wells Fargo said its mortgage origination volume grew to $398 billion in 2006, up 9% from the year before.

But in the fourth quarter, Wells Fargo produced $70 billion of mortgage originations, down 20% from the fourth quarter of 2005.

On the positive side, Wells Fargo said that its gain-on-sale margin for mortgages increased slightly in the fourth quarter, reflecting strong secondary market demand.

Wells also said that its pipeline of home loan applications at the end of the fourth quarter, at $48 billion, was only down slightly from its pipeline of $50 billion a year earlier.

The company also serviced a portfolio that grew to $1.37 trillion at the end of last year, up 38% from a year earlier. That helped generate $1 billion of gross servicing fees in the fourth quarter of last year, up 50% from one year earlier.

The company serviced home loans for 7.6 million customers at year-end, up 37% from a year earlier. Wells Fargo said that changes in the MSR value and changes in the value of hedging assets largely offset each other.

Wells Fargo participated in the largest bulk servicing transfer in history last year, buying servicing rights on $140 billion of home loans from Washington Mutual. Wells Fargo said its home-equity portfolio had grown to $79 billion, up 10% from one year earlier.

Wells Fargo said it had $53 billion of single-family first mortgages on its books at year-end, representing 11% of total assets, down from 16% a year earlier.

In the company's earnings announcement, Mark Oman, senior EVP of the home and consumer finance group, noted the challenges associated with the flat to inverted yield curve and the housing slowdown.

"Despite this environment, we continued our long track record of growing our mortgage servicing business at double-digit rates, which provides opportunities to cross-sell and retain these customers. We remain very disciplined in residential real estate lending by ensuring that our product offering is appropriate for both our customers and the investors in our securities. We have not offered some of the higher-risk products, such as the payment-option ARM," Mr. Oman said.

In a recorded call for investors and analysts, Wells Fargo's chief financial officer, Howard Atkins, pointed out that Wells Fargo continues to have the widest net interest margin among large bank holding companies, at 4.93%. At a time when most companies are reporting margin compression, Wells Fargo increased its net interest margin by 14 basis points in the fourth quarter compared with the third. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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