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Wells Fargo (WFC)
Wells Fargo Finally Feels Impact of Credit Crisis
Wells Fargo is the nation's fifth largest bank, and second largest mortgage lender, and until recently had been pleasing its investors and customers by managing to avoid any trouble through the recent mortgage crisis. After the markets closed yesterday, however, Wells Fargo put out a press release announcing that the company will be recording a loss of approximately $1.4 billion next quarter. Investors were surprised by this unexpected news, sending Wells Fargo's stock down almost 5% in after-hours trading. How did Wells Fargo previously manage to avoid the major downfalls that many other companies have experienced, and what will its outlook be in the near future?
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Wells Fargo announced that it will be creating an $11.9 billion portfolio that will include all of the bank's riskiest loans. It expects that the $1.4 billion it is setting aside will be enough to cover the losses that will be incurred by this portfolio. Most of these riskiest loans are ones that Wells Fargo bought from outside brokers, not ones that originated from within Wells Fargo. Many of these loans are for mortgages in areas across the country where the housing market is doing the worst. Wells Fargo intends to sell off this portfolio.
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Wells Fargo took many cautious steps which helped lessen the impact of the mortgage crisis on the company. The fact that Wells Fargo hasn't encountered problems before this point, and the reality that the company's total projected losses are still less than many other banks, both go to show that this company was doing something differently than many of their competitors. The riskiest loans that they are setting apart only account for 3% of Wells Fargo's total outstanding loans. These loans are only a small percentage of its total loans because Wells Fargo limited the amount of loans it took on that were adjustable-rate mortgages or mortgages from outsides sources. The company also limited their exposure to subprime mortgages and collateralized debt obligations.
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Wells Fargo has announced that the company will now be even more careful of what loans it accepts, due to the recent credit concerns. They have already stopped purchasing home-equity loans from other banks and mortgage companies, and plan to stop purchasing them from outside brokers as well, since these have been some of the more risky loans to be held by the company. It really shouldn't come as a surprise that Wells Fargo was hit by the mortgage crisis, because it has already been a noticeable impact on most other major banks. Rather, investors should be grateful that the impact wasn't any worse, and that Wells Fargo seems to know the steps to take to minimize any further impact. Wells Fargo will struggle, as the rest of the mortgage companies are, but the steps it has taken so far will hopefully help the company to recover as smoothly and quickly as possible.
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