Wells Fargo & Co. (WFC) has decided to exit its reverse mortgage business due to volatile home values. While the company would continue to service the loans of existing reverse mortgage customers, it would not originate any new loan.
In addition to unpredictable home values in the market now, Wells Fargo also cited that certain restrictions related to reverse mortgages create difficulty in determining borrowers’ ability to meet obligations of homeownership and their reverse mortgages such as payment of property taxes and homeowners’ insurance.
A reverse mortgage is a form of equity release or lifetime mortgage. It is a loan available to seniors aged 62 or older, as per U.S. Department of Housing and Urban Development, and is used to release the home equity in a property as a lump sum or multiple payments. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold.
Wells Fargo started reverse mortgage origination in 1990. Reverse mortgages were 1.2% of Wells Fargo’s overall mortgage volume as of 2010. The decision to exit the reverse mortgage business would impact 1,000 employees of that division. Wells Fargo would offer them opportunities to apply for other jobs at the company.
Apart from Wells Fargo, Bank of America Corp. (BAC) also announced its decision to exit the reverse mortgage business earlier in the year, in an effort to focus more on its core mortgage operations.
Our Take
Looking forward, the merger with Wachovia offers significant potential for growth and above-average profitability in the longer term.
However, we believe that revenue will remain challenged given the tepid economic recovery with a lackluster loan growth and legacy mortgage issues. In addition, regulatory issues also pose as headwinds for the company’s top line.
Wells Fargo shares retain a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
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