Why Wells Fargo Has More Foreclosures than Bank of America and Citigroup Combined

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From July to December of last year, foreclosures at Wells Fargo (NYSE: WFC  ) increased by nearly a billion dollars. 

That's right. Nearly $1 billion. Take a moment to reflect on that number. Breathe slowly. Now stop worrying. Just let it go. For Wells Fargo investors, the rise in foreclosures is a symptom of something very good. 

Breaking down the numbers
In the aftermath of the real estate bubble collapse, Wells and most other banks saw a steady decline in foreclosures. The economy began to heal; the bank worked out problem loans and properties.

Then, after June 30, 2013, something changed.

Other real estate owned (accounting speak for foreclosed properties, abbreviated OREO) bottomed at $3.07 billion at the end of the second quarter. At the end of the third quarter, that number increased to $3.69 billion. By the end of the year, the number was up to $3.84 billion.

For comparison, Bank of America  (NYSE: BAC  ) reported just $1.97 billion in OREO as of December 31. Citigroup (NYSE: C  ) was even stronger, reporting just $307 million for the same period. That means that Wells' OREO portfolio is 12.5 times larger than Citi's. That's a huge difference!

What's driving Wells' OREO? Mostly its single family homes.

As of December 31, 2013, Wells foreclosed properties were primarily made up of single family homes and failed construction and development projects. Together, these two categories account for about 28% of the bank's OREO. Ginnie Mae properties--the Government National Mortgage Association, a wholly owned subsidiary of the U.S. Department of Housing and Urban Development--accounted for another 54%. All told, about 85% of the bank's OREO is residential property.

What does management have to say about all this?
In the company's 2013 annual report, CEO John Stumpf went out of his way to highlight Wells' efforts to reduce foreclosures. 

Stumpf said:

Just as important, we are helping people stay in their homes. Wells Fargo is a leader in preventing foreclosures — since 2009, we have completed more than 904,000 home loan modifications and provided $7.7 billion in principal forgiveness. We also have participated in nearly 1,200 home preservation events, including hosting 107 of our own workshops where we have met one-on-one with nearly 45,000 customers facing financial hardships.

Why the big focus on foreclosures? Because no matter how you slice it, foreclosures are bad. They put everyday people out of their homes. They disrupt families. They hurt the bank's bottom line. And a slew of foreclosure related scandals have put banks on the front page of newspapers--a public relations nightmare.

How then, is Stumpf allowing foreclosures to creep up? These problems are universally bad! What gives?!

The reality of being a growing bank
The reality is that some level of foreclosures are a part of the day to day business of banking. Some loans, however well underwritten, will go bad. That's why banks take collateral in the first place. Knowing this, we should recognize OREO not just in terms of raw dollars, but also as a percentage of assets.

And in terms of assets, the picture for Wells Fargo is not as bad. OREO as a percentage of assets increased from 0.23% to just 0.27% from June to December of last year. Even with the increase, this still represents an improvement from year end 2012 when the bank reported 0.29%. 

This number is still above average in a peer comparison (Bank of America reports 0.12% and Citigroup 0.02%, which is stellar), but it is perfectly acceptable in light of the asset growth on Wells' balance sheet.

Wells grew from $1.34 trillion in total assets as of June 30 to $1.42 trillion at year end. For context, according to the FFIEC, there are only 20 banks with total assets greater than $142. Wells Fargo grew by that much in just six months!! It truly is a staggering number. 

Bank of America on the other hand is shrinking, and Citigroup is barely maintaining its current level of assets. 

Any analysis of a bank should include a review of the level of OREO on the books. Its a good indication of credit culture, asset quality, and the long term stability of earnings. Reckless lenders will have more foreclosures. Reckless lenders also go out of business.

But be careful not to ignore the possible positive causes for an increase in OREO. Problem loans are a part of banking. The objective is to minimize them while still focusing on growth and profits. Wells Fargo is doing exactly that, and that's why investors should not be concerned about the bank's growing OREO.

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Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On April 08, 2014, at 1:26 AM, 2muchBS wrote:

    Oh brother....the reason Wells Fargo is posting more foreclosures is because Bank of ScamAmerica sold off thousands of homes to them. This is a sad attempt to throw Wells Fargo under the bus...the driver of the bus is the past and current CEO of Bank of Scam America..the ones making billions of dollars on government kickbacks, then giving them to someone else. Politics at its best. Screw the hard working people pocket all that you can while the government keeps printing $$$...Pathetic

  • Report this Comment On April 08, 2014, at 3:11 AM, deejean wrote:

    Wells Fargo is the worst bank or financial company in the world. I financed a car with them once, they were so annoying, I almost lost my mind. My due date for payment was on the 5th of the month, I would make my payment on the 3rd every month and they would call on the 6 or 7th (3 to 4 days) after the payment was made for the next month payment. They would call about two to three times a week, saying it was a courtesy call to remind me of the next months payment. How can you not be reminded about the payment every time you look at the car? They worried me so bad, I finally told them to come and pick their car up. When I gave the car up, of course, they took their time picking the car up. They tried to report a repossession on my credit but they couldn't because I let my attorney know what the problem was and my payments were current at the time I decided to take this action. My attorney wrote them a letter explaining the reason I returned the car to them which was Unfair Harassment. I will NEVER finance anything else with Wells Fargo, they are the world's worse. That was my experience with them.

  • Report this Comment On April 08, 2014, at 3:12 AM, deejean wrote:

    Wells Fargo was like the bank or finance company from hell to me.

  • Report this Comment On April 08, 2014, at 4:00 AM, zebrausa wrote:

    I did not read the article and do not need too. This is how the scam goes. Wells Fargo increases the mortgage for some mysterious reason, let's say your insurance goes up $200 a month. Wells Fargo then increases your house payment by oh let's see maybe by a $1000 a month because they need all of there money up front to pay the increased premium. Well the home owner then can not afford the increased house payment and they foreclose.

    This happened to me except I had the where with all to afford the increased cost and I finally had to sell my house with a small profit after living there for 15 yrs. I will never do business with Wells Fargo again in any way, shape, or form ever.

    What is the mortgage scam about anyway. A home loan should be structure just like a car loan. You pay it off every month instead of after 15 years of paying. Our elected officials should all go to jail for allowing this noose around every home owners neck that is paying their mortgage.

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