Wells Hits $1.5T MSR Threshold

For all the bad news affecting the mortgage business, the biggest home loan servicers continue to grow their portfolios, demonstrating long-term confidence in the business.

Wells Fargo owned servicing rights on $1.53 trillion in home loans at the end of 2007, up 12% from the prior year, the company said in its fourth-quarter earnings report. That makes Wells Fargo the first lender to officially cross the $1.5 trillion mark.

Countrywide Financial Corp., which has entered a deal to be acquired by Bank of America, serviced $1.48 trillion at the end of the year. (See related story, page 27.)

In a recorded conference call for investors, Wells Fargo's chief financial officer, Bob Strickland, said that growth in the servicing portfolio contributed to a 36% increase in non-interest income from the mortgage banking unit.

"The 73% fourth-quarter year-over-year increase in net servicing fee income more than offset the 28% decline in net gains on mortgage loan/sales activities," he said.

Like other lenders, Wells Fargo saw higher credit costs in the fourth quarter. Wells Fargo said that consumer real estate portfolios contributed almost half of the $1.2 billion in net charge-offs companywide during the quarter.

But Well's Fargo's $71 billion of first mortgages held in portfolio performed well, with an annualized charge-off rate of 0.19% during the quarter, or $32 million.

Wells Fargo hasn't entirely dodged the subprime bullet, but its credit costs are lower than many of its peers as a result of more conservative underwriting. The company's diversified business mix also helped Wells Fargo post stronger fourth-quarter and full-year earnings than most other big players in the mortgage industry.

Intriguingly, Wells Fargo's hedging of its mortgage servicing rights posted outperformance in the fourth quarter, which yielded a $280 million increase in mortgage servicing income.

Wells Fargo's MSR asset declined in value by $1.9 billion, reflecting lower interest rates at the end of the fourth quarter than at the start. However, its financial instruments used to hedge the asset increased in value by $2.2 billion, the company said.

Wells Fargo valued its MSR asset at 1.2% of loans serviced for others at the end of 2007, the lowest capitalization ratio in 10 quarters and 15 basis points lower than the third-quarter capitalization rate, Wells Fargo said.

Mark Oman, head of Wells Fargo's home and consumer finance group, said the company "has taken appropriate steps to reduce credit and capital markets risk." In a sign that Wells Fargo remains committed to the mortgage business, he also said Wells Fargo has capitalized on the industry's contraction by hiring high-quality loan officers from competitors.

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