Summary
Wells Fargo & Company (WFC) announced on November 27, 2007, a significant adjustment to its credit loss provisioning and lending practices, particularly within its home equity loan portfolio. The company will record a special pre-tax provision of $1.4 billion for the fourth quarter of 2007. This provision is largely attributed to higher anticipated losses from certain indirect lending channels, specifically wholesale and correspondent relationships, which the company is ceasing or restricting. These channels, particularly those with higher loan-to-value ratios or where the second mortgage is not behind a Wells Fargo first mortgage, are being moved to a special liquidating portfolio, which constituted about 3% of total loans outstanding at September 30, 2007. In addition to the provision for credit losses, Wells Fargo also addressed the accounting impact of the Visa restructuring. The company will record litigation liabilities totaling $265 million ($95 million for Q2 2006 and $170 million for Q3 2007) related to indemnification obligations under judgment sharing agreements. While these amounts reduce previously reported diluted earnings per share, management considers them immaterial to the affected periods. The company expects its Q4 2007 provision to adequately cover all inherent losses across its portfolios, including those in the newly designated liquidating portfolio.
Key Highlights
- 1Wells Fargo is establishing a special fourth quarter 2007 provision for credit losses of $1.4 billion (pre-tax).
- 2The provision is primarily to address anticipated higher losses in certain indirect home equity lending channels (wholesale and correspondent).
- 3The company is significantly tightening home equity lending standards by ceasing new originations/acquisitions through specific indirect channels.
- 4A $11.9 billion portfolio of higher-risk home equity loans (3% of total loans) will be placed into a special liquidating portfolio.
- 5These loans in the liquidating portfolio are concentrated in recent vintages, with high loan-to-value ratios and are exposed to markets with steep housing price declines.
- 6Wells Fargo will record $265 million in litigation liabilities related to Visa restructuring transactions (for Q2 2006 and Q3 2007).
- 7The company expects the Q4 2007 provision to cover all losses inherent in its portfolios.