I was going to start today’s commentary (from San Diego) with a reminder to, "Be careful what you wish for," or a reminder that no one, at the start of the year, if asked about where mortgage rates would be in mid-July and if their staffs would be busy, would have guessed where we are now. Just look at how low rates are, and how busy companies are – great news for our industry!

But then we had the little issue of Wells Fargo withdrawing from wholesale that popped up. After some initial chatter about, “Maybe Wells is having capacity issues” or “Maybe Wells wants to focus on correspondent and retail,” details began to emerge. Although it announced that the decision to eliminate its wholesale channel was not tied to the Department of Justice settlement, the two are strangely linked together.

So first, the settlement. Wells Fargo announced a “definitive settlement agreement between Wells Fargo Bank, N.A. and the U.S. Department of Justice (DOJ) that resolves the DOJ's previously disclosed claims that some Wells Fargo mortgages may have had a disparate impact on some African-American and Hispanic borrowers. The DOJ claims are based on a statistical survey of Wells Fargo Home Mortgage loans between 2004 and 2009, and the claims primarily relate to mortgages priced and sold to consumers by independent mortgage brokers. While Wells Fargo denies the claims, the company has agreed to pay $125 million to borrowers that the DOJ believes were adversely impacted by mortgages priced and sold by independent mortgage brokers through its Wholesale channel. Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ, and to instead devote its resources to continuing to provide fair credit services and choices to eligible consumers, and important and meaningful assistance to borrowers in distressed U.S. real estate markets.”

But Wells also announced that as of today it is discontinuing funding mortgages that are originated, priced, and sold by independent mortgage brokers through its mortgage wholesale channel. (Here’s one link: http://www.bloomberg.com/news/2012-07-12/wells-fargo-to-exit-wholesale-channel-after-fair-lending-accord.html.) The company says that wholesale is only 5% of its business anyway – but when you’re the #1 lender with over a 30% market share, 5% is quite a bit. Of course, mortgage brokers operate as independent businesses and are not employed by Wells Fargo, so Wells cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers.

A knee-jerk reaction is that this is fine, and that other wholesalers are only too happy to take up the volume. But they already have enough volume. Wells stopped making subprime loans through independent mortgage brokers in 2007 and stopped all subprime home lending in 2008. But are brokers suffering a death by a thousand cuts? When one looks at the remaining top wholesale lenders, can they all absorb the volume? For the first quarter we had Wells Fargo, Provident Funding, Flagstar, ING, Fifth Third, MetLife, US Bank, Stearns, Citi, SunTrust, Union Bank, Franklin American, Sierra Pacific, EverBank, and Cole Taylor Bank, for those companies reporting to National Mortgage News. And remember that ING and MetLife are gone, following BofA’s exit and GMAC’s cutbacks.

Some believe that the Wells move continues a trend of big banks choosing to focus on retail and mortgage bank channels because - in the wake of ever increasing Finreg, CFPB, and other regulations - these firms are looking for ways to control risk and quality of originations. They may believe it’s easier to do this through retail and mortgage bank channels than it is through the broker channels. Others point to the reps and warrants – in a world of limited capacity, and onerous reps & warrants, isn’t business more prudent when dealing with larger counterparties with more financial stability, more established policies and procedures, and the greater ability to handle repurchases? In the broker channel, even though the investor is underwriting, drawing docs, and funding the loan, there has always been the question of ensuring quality – but plenty of authorities point to the solid performance of TPO production. Remember that “Wells Fargo (and others) cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers. In today’s Dodd Frank world of lenders having to evaluate not only their own risk, policies & procedures, and finances, but also those of their counterparties, is it worth the effort?

If the settlement verbiage somehow magically changes, and/or Wells is not held liable for the distant actions of brokers, would that cause them to come back into wholesale lending? And with Wells’ move, will other banks such as Flagstar, Fifth Third, or US Bank reconsider their position in that channel? I don’t know the answers, but in this industry change seems to be constant.

And what are borrowers seeing/hearing? Here's one example: http://in.reuters.com/article/2012/07/12/column-personalfinance-idINL2E8ICGRP20120712. One industry vet wrote me, “The broker model that was floundering is now done.  Not even the largest and strongest brokers can survive the exit of Wells.  ALL small brokers will now close up shop. The lucky ones will be able to move on to join up with bankers. The Federal government keeps throwing gasoline on the fire expecting to put it out!  What a disgrace.  Consumer choice and advocacy are going to be hurt by this.”

And, “The only reason that brokers made most of these loans in bad areas was because the banks didn't have branches there. They helped people in these areas without access to credit finance the dreams of homeownership!  Did they charge more?  Sure they did. But that was not due to some plot to take advantage of people.  It was because as a whole, these loans were (I) smaller (ii) harder to do and involved more work as a result (with a much lower closing rate than A plus loans and (iii) because there was less competition since the banks didn't want to go into these areas to source the loans!  Since when is any of that against America values or a fraud on the consumer?  Do pawn shops and check cashing services charge higher rates then banks?  Absolutely, but for the same reasons as enumerated above. There is no outcry about that! This is really outrageous.  If we don't get "regime change" this November, our economy is going to limp along for 4 more years and likely fall back into a recession!”

And to finish the Wells news, it reported its 10th consecutive quarter of earnings growth as a result of a booming business originating and refinancing mortgages. The bank’s second-quarter profit was a record $4.6 billion, a 17 percent rise from the $3.9 billion profit it reported a year earlier. Although it seems to have an identity crisis (big bank? Small bank?), Wells passed JPMorgan Chase & Co. to become the largest American bank by stock market capitalization. It originated $131 billion of mortgages in the second quarter, up from $129 billion in the first quarter of the year. Meanwhile, the improving credit quality of the bank’s customers allowed the banks to set aside less money for loan losses.

JPMorgan Chase also reported earnings for the 2^nd quarter: net income of $5.0 billion, or $1.21 per share on revenue of $22.9 billion. (Those numbers include the trading losses.) Chase’s mortgage banking originations were up 29% and mortgage production and servicing units reported a net income of $604 million compared with a net loss of $649 million in the prior year. “Mortgage production reported pretax income of $931 million, an increase of $645 million from the prior year. Mortgage production-related revenue, excluding repurchase losses, was $1.6 billion, an increase of $595 million, or 62%, from the prior year, reflecting wider margins, driven by market conditions and mix, and higher volumes, due to a favorable refinancing environment, including the impact of the HARP. Production expense was $620 million, an increase of $163 million, or 36%, reflecting higher volumes. Repurchase losses were $10 million, compared with $223 million in the prior year and $302 million in the prior quarter. The current quarter reflected a $216 million reduction in the repurchase liability and lower realized repurchase losses when compared to prior quarter.”

Chase reported that mortgage loan originations were $43.9 billion, up 29% from the prior year and 14% compared with the prior quarter; Retail channel originations (branch and direct to consumer) were a record of $26.1 billion, up 26% from the prior year and 12% compared with the prior quarter. Mortgage loan application volumes were $66.9 billion, up 37% from the prior year and 12% from the prior quarter, primarily reflecting refinancing activity. Total third-party mortgage loans serviced was $860.0 billion, down 9% from the prior year and 3% from the prior quarter.

Taking a quick look at the markets, the U.S. stock market continued to slide lower on Thursday, attributed to (for lack of anything better) the lack of news regarding additional stimulus from the FOMC minutes, fears of a global economic slowdown, and disappointing corporate results. But interest rate markets were pretty quiet with the 10-yr closing at 1.48%. But relative to Treasury rates, mortgages “widened out” a little and were actually worse by about .125 mostly due to a pick-up in supply – brokers locking in when the Wells news hit?

Today, the economic calendar includes Producer Price Index numbers (not that anyone cares too much about inflation right now, but it was +.1% instead of the expected -.4) and the University of Michigan Confidence number at 9:55AM. The 10-yr is up a shade near 1.50% and MBS prices are a tad worse.

(Some things even stump Dear Abby. These are supposedly true notes. Part 2 of 2.)

Dear Abby,
Our son writes that he is taking Judo.  Why would a boy who was raised in a good Christian home turn against his own?
Dear Abby,
I joined the Navy to see the world.  I've seen it.  Now how do I get out?
Dear Abby,
My forty year old son has been paying a psychiatrist $50.00 an hour every week for two and a half years.  He must be crazy.
Dear Abby,
I was married to Bill for three months and I didn't know he drank until one night he came home sober.
Dear Abby,
My mother is mean and short tempered I think she is going through mental pause.
Dear Abby,
You told some woman whose husband had lost all interest in sex to send him to a doctor.  Well, my husband lost all interest in sex and he IS a doctor.  Now what do I do?