Have you heard what the CEO of Warren Buffett’s favorite bank is saying about the housing market? Its more than just words; it’s where the bank is putting its money, too!
Wells Fargo & Co (NYSE:WFC) CEO John Stumpf has been making the media rounds of late, with the housing market on his mind. Stumpf leaves no question about his viewpoint on the subject; Stumpf, and by extension Wells, think that U.S. housing is back.
Putting your money where your mouth is
“Housing for two-thirds of Americans is still the American Dream. I’m bullish on housing.”
This quote puts Wells Fargo & Co (NYSE:WFC)’s view on housing in no uncertain terms. And Wells’ financial statements back up that sentiment. Wells’ biggest business is mortgage lending, contributing 26% of total non-interest income in the first quarter. That was the sixth consecutive quarter of mortgage production greater than $100 billion.
Stumpf estimates that the size of the U.S. mortgage market is about $10 trillion, or roughly the equivalent of all the nation’s bank deposits combined. Stumpf contends that a market this huge can’t exist without both a strong secondary market and some government involvement (probably some tweaked format to Fannie Mae and Freddie Mac). Without the secondary markets and government, banks simply don’t have the funding to meet public demand at a reasonable price. Remember Econ 101: The same demand with less supply would lead to higher prices.
“Everyone who touches a mortgage should all be interested in making a good mortgage.“
This quote strikes at the heart of the financial crisis. When originators, packagers, ratings agencies, and investors fail to understand — or, worse yet, even consider — the underlying credit quality of a loan, the entire system falls apart.
Wells is practicing what it preaches. The bank has $252 billion of first-lien mortgage loans on the books as of the first quarter, which is by far the overall highest concentration on its books. Even with such a large portfolio, delinquent loans — those more than 30 days past due — are just 4.9%, compared with 9% at Bank of America Corp (NYSE:BAC), 7.1% at JPMorgan Chase & Co. (NYSE:JPM), and 5.9% at Citigroup Inc (NYSE:C).
Stumpf has recommended that the government should stop purchasing mortgages outright as it does today. He suggests that a move like that would increase accountability throughout the mortgage-origination process. As an alternative, Stumpf thinks it should offer guarantees on these mortgages. The result would be greater recourse for originators and packagers if the loan goes bad. In this scenario, instead of having the government take the loss, private investors would have incentive to police the system and still have the comfort of the full faith and credit of the U.S. government via a guarantee.