The news that Wells Fargo (NYSE:WFC) is exiting the mortgage joint venture arena is grabbing headlines, but it shouldn't surprise anyone. The decision comes on the heels of new regulations, stemming from Dodd-Frank, which will negatively affect this type of business. Rather than fighting against the tide, Wells has decided to end its joint ventures with its eight partners.
Wells obviously saw this day coming. A bank representative, Franklin Codel, told Bloomberg that Wells once participated in over 100 of these joint ventures, so it's clear that things have been winding down for some time. According to Codel, it will take from 12 to 18 months to unwind the current eight partnerships.
Keeping an eye on legal issues
This move by Wells is not unusual. Time and again, the fourth-largest U.S. bank has read the writing on the wall, making changes as needed to limit future legal and regulatory problems.
The bank's foresight hasn't kept it completely out of trouble, though. Along with fellows Bank of America, Citigroup, and JPMorgan Chase, Wells signed off on the National Mortgage Settlement, pledging to rectify its foreclosure practices.
Considering how dominant Wells has been in the mortgage market over the past few years, it's understandable they would experience at least some mortgage-related problems. Imagine how much additional legal expense it would currently be incurring, however, had it not -- in another prescient move -- begun to back away from subprime lending back in 2004.
Similarly, Wells Fargo ceased wholesale mortgage lending a little over one year ago, just as it announced its settlement with the U.S. Department of Justice regarding alleged discrimination tied to a sampling of its mortgage loans written between 2004 and 2009. Though Wells noted the termination of its wholesale channel was separate from the settlement, it stated that shutting down that business would give the bank more direct control over its mortgage lending practices. Earlier, both Bank of America and Citigroup had also exited this type of lending.
The effect on lending should be minimal
Since Codel notes that joint ventures made up only 3% of new loans in the second quarter, this move shouldn't affect the bank's lending pipeline in any appreciable way. As for the partnerships, at least one is planning to continue on, without Wells by its side.
HomeServices Lending LLC announced that it will become a wholly owned subsidiary of HomeServices of America, an affiliate of Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B). HomeServices Lending is the biggest of the remaining joint ventures, accounting for $3.5 billion to $4 billion of loan production each year. According to the announcement, the new entity may continue to have dealings with Wells Fargo in the future.
Considering the fondness Warren Buffett has for Wells Fargo, a future relationship is quite possible. Undoubtedly, the bank's ability to predict and react to future threats is part of the reason Buffett invests so heavily in Wells. This farsightedness surely played a part in the bank's recent ascension to the rank of the world's largest bank, as Wells' market capitalization surpassed six-year champ Industrial & Commerical Bank of China. Hindsight can impart valuable lessons, but it is foresight that will put you at the top of the heap.