Wells Fargo CEO John Stumpf said Thursday that housing is in the worst shape since the economic devastation of the 1930s.
“We have not seen a nationwide decline in housing like this since the Great Depression,” Stumpf told those attending a Merrill Lynch & Co. (NYSE: MER) investment conference.
He anticipates hard times ahead for home owners in financial straits — and their bankers.
“I don’t think we’re in the ninth inning of winding this,” Stumpf said. “If we are, it’s an extra-inning game.
“The losses have turned out to be greater than expected because home prices have declined faster and deeper than expected,” said Stumpf, who took the reins at the nation’s fifth-largest bank earlier in June. California’s Central Valley and the Midwest’s auto-manufacturing states (namely, Michigan and Ohio) are creating significant mortgage losses for Wells Fargo (NYSE: WFC) and other lenders.
Wells expects additional loan losses in the current quarter and into 2008, especially in its home equity loan portfolio. The bank realized $153 million in home equity loan losses in the third quarter.
Still, Stumpf said the bank has “minimal” exposure to collateralized debt obligations and other troubled mortgage-related securities that have prompted other banks to write off a total of $40 billion — so far.
On Friday, Keefe, Bruyette & Woods downgraded its rating on Wells Fargo’s shares to “underperform” from “market perform.” In a note to clients, KBW analyst Frederick Cannon said the San Francisco bank enjoys a strong franchise but it will suffer significant loan losses in the declining housing market.
Stumpf told investors that he was unaware of some of exotic mortgage-related investments being made by competitors until reading about them in the newspaper.
“It’s interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine,” he quipped.
Stumpf’s comments this week were more pessimistic than his luncheon remarks last month to the Financial Women’s Association of San Francisco.
At that time, he was critical of some of the risky, exotic mortgages offered by competitors in recent years, such as adjustable-rate mortgages that give borrowers a choice on what monthly payment they’d like to make each month. The so-called option ARMs can have negative amortization which means the loan balance rises over time instead of being paid off.
Stumpf said Wells didn’t offer such mortgages because it didn’t seem right. The San Francisco bank’s federal regulators don’t allow negative amortization to occur with credit card debt, Stumpf observed, so why offer such loans on the typical borrower’s largest and most important asset?