Wells Rebalances Portfolio, Sees Record Low Average Rate

Wells Fargo racked up a solid quarter financially despite jettisoning a portfolio of lower-yield adjustable-rate mortgages at a loss.

At the same time, a $375 million recapture of impairment on the company's mortgage servicing portfolio helped boost Wells Fargo's income, and company executives said they expect the servicing portfolio to provide more earnings support in future quarters if rates trend upward.

Because Wells Fargo does not hedge the entire value of its servicing portfolio, the company expects that MSR gains will continue to exceed hedging losses, chief financial officer Howard Atkins said in a recorded management call discussing company earnings.

And if the mortgage origination business is slowing down, you wouldn't know it from Wells Fargo's second quarter. Although interest rates trended upward during the quarter, a strong pipeline leftover from the first quarter helped Wells Fargo tally $96 billion in mortgage originations, a $31 billion increase from the prior quarter.

Weighing down on the company's earnings, however, was the sale of $3.5 billion in securities, mostly mortgage-backed, that had yields below 4%, the company said. It also sold some $10.5 billion of three- and five-year adjustable-rate mortgages with yields of 4% or below in a move designed to improve the company's interest margin on its balance sheet.

The company said that the sale of securities and ARM loans created a loss of $222 million for the quarter.

"These actions largely cleared out the lowest yielding mortgage assets from our balance sheet," said Mr. Atkins.

In a harbinger of continued strength in Wells Fargo's mortgage servicing portfolio, the company reported that it now owns servicing rights on $749 billion of home loans, up 18% from 12 months earlier. In addition, the weighted average note rate on the portfolio dropped to 5.75%.

The carrying value of the MSR portfolio as of June 30 was $8.5 billion, or 1.37% of loans serviced for others. That's up from an MSR value of $6.9 billion, at 1.15% of loans serviced for others, as of year-end 2003.

"The servicing side of our mortgage business became even more valuable in the second quarter," Mr. Atkins said.

Mr. Atkins said business and commercial real estate loan demand grew markedly in the second quarter for the first time in three years.

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