In 2012, fueled by historically low interest rates and stabilizing home prices, Wells Fargo's mortgage banking unit churned out an industry-leading $524 billion of mortgage loans and boosted the unit's revenue 49% compared to 2011. To put this $524 billion in perspective, not even the infamous Countrywide Financial, now owned by Bank of America , eclipsed the $500 billion mark in the boom years of 2005 or 2006.

While banks like B of A and smaller lenders scaled back mortgage operations, Wells Fargo remained steadfast in its position in the market and was able to take full advantage of the recent refinancing boom. The simple thought that Wells Fargo's current mortgage business is even bigger than Countrywide's in its heyday may cause Wells Fargo shareholders to cringe.

Source: Wells Fargo 10-Ks.

However, it is important to remember that not all mortgages are created equally. The vast majority of mortgage loans in the United States fall into two categories: Conforming and nonconforming.

Conforming mortgages are loans that have a specified limited loan amount ranging between $417,000 and $625,000, depending on the area, and meet certain debt-to-income ratio standards. These limits are set by the Federal Housing Finance Agency and determine which mortgage institutions like Fannie Mae and Freddie Mac can purchase from lenders and securitize. Naturally, nonconforming mortgage loans do not meet these standards and must either be kept on the lender's books or securitized in the private market, a market that has since dried up since the financial crisis.

The main difference between Wells Fargo's mortgage volume today and Countrywide's in 2006 is a shift in mortgage type. A staggering 46% of Countrywide's loans were non-conforming loans. Before investors became almost completely opposed to private-label mortgage-backed securities, Countrywide was able to profitably market these mortgages into securities. Once the credit crisis hit, Countrywide (then part of B of A) had no way to keep its origination engine churning in the absence of private-label liquidity.

Source: Countrywide Financial's 2006 10-K.

Unlike 2006, conforming mortgages are now driving the increase in origination volume. Due to the Federal Reserve's presence in the market and absence of credit risk associated with agency mortgaged-backed securities, liquidity has been flowing through Wells Fargo and other originators as loan supply has kept pace with the enormous refinancing demand. Refinancing demand may taper off as interest rates eventually creep higher, and Wells Fargo's revenue from its mortgage banking operation will probably decline from current levels. Despite experiencing enormous volume, given the nature of its originations, Wells Fargo's shareholders should not be concerned about becoming the second-coming of Countrywide.

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The article Could Wells Fargo Become the Next Countrywide? originally appeared on

David Hanson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Andrew Misocky

This articles title made my eyes pop.

I left CFC in 2005 because I saw flashing red lights everywhere. I ran the biggest branch on the east coast and I was called crazy for leaving and going to WFC. I left WFC yesterday after creating the second biggest area on the east coast. Because again I see flashing red lights.
Storied CFO leaves shortly after the biggest bank merger ever. The market asks no questions beside Chris Whalen and he is quickly dismissed as over-reacting. WFC says Atkins is suddenly retiring without a succession plan after 23 years.
Then they say personal issues. Then the comp package goes from 10 to 20 to 27 million and he never speaks.

In 2012 WFC originated massive amounts of streamline FHA loans which are todays equivalent of "no doc" loans and WFC had the LOWEST credit score qualifier on the street to drive volume. Lower than anything we did at CFC. Then WFC gets sued by FHA for hasty originations in 2001-2005 setting up the precedent (I believe) to sue them for the potentially soured streamlines of the 2012 vintage. WFC wrote 40% of FHA's loans in 2012. You would think we would have a decent relationship with them to not get sued. But they are setting up the precedent to push back the 92 BILLION WFC wrote in FHA loans in 2012 I believe.

Then there is the overvaluing of the Golden West Book of business. This is the WORST vintage of loans EVER! ALL NON CONFORMING. And the fact that many of them are not in default is no safe haven. They are loans with Negative Am...Meaning the liability GROWS every month for WFC if they are just pay the least. And wouldn't you if you owned a California Property once worth 2 million and now worth 1 million? they aren't going to default until the negative am period runs out because its more expense to move and rent so they are biding their time. But these folks are likely to default.

All of this is public knowledge but unlike BOA, WFC gets a pass. Watch any video about WFC. They can do no wrong. I joined them because they are EXACTLY like CFC. But they were smarter. Norwest bought a pretty bank with a cute history to hide the fact that this is a cyclically driven, highly profitable, yet highly risky PURE MORTGAGE company. Why do you think they don't break out mortgage earnings?

But no one questions them. They get the ultimate hall pass. and I am selling my 250K in WFC stock and buying Jan 2015 PUTS. Which by the way have SKYROCKETED lately and I have been too busy planning my exit to go into my Ameritrade account.

March 20 2013 at 7:56 PM Report abuse rate up rate down Reply