Wells Fargo & Co, the nation's second-largest mortgage lender after Countrywide Financial, said on Tuesday that it would take a US$1.4 billion fourth-quarter charge for losses it anticipated in connection with home loans.
Wells Fargo said it would continue to provide home equity financing directly to customers, but that it would not originate or acquire home equity loans through indirect channels.
The bank will also not originate home equity loans through third parties when the combined loan-to-value ratio of the first and second mortgages is more than 90 percent or where the second mortgage is not behind a Wells Fargo loan.
The bank is putting US$11.9 billion into a special liquidating portfolio. The bank's filing with the Securities and Exchange Commission said that the figure was 3 percent of its total loans outstanding, but that it represented the riskiest element of the US$83.4 billion in its national home equity group portfolio. The loans are generally clustered in areas of the country that are having the greatest decline in retail prices.
R. Scott Siefers, an analyst who follows Wells Fargo for Sandler O'Neill, said: "It is unfortunate certainly because Wells Fargo has had an aura of invincibility. Over the last few years, it has not gotten involved in a lot of the issues that have caused so much pain for the group. It is one of the largest mortgage lenders in the country so this is going to be painful for everybody."
"As good as they are, we are dealing with a pretty big issue industrywide," Siefers said. "Will there be more? It will depend on how depressed the real estate market stays, but they are taking care of a good deal of the riskiest stuff now. Still, identifying credit problems is always difficult to do in one fell swoop," he said.
The bank said it expected to write off US$1 billion next year and in 2009.
The chief financial officer, Howard Atkins, said in a statement on Tuesday that "the bank had largely avoided many of the credit and capital market problem areas in the industry."
Meanwhile, Freddie Mac, a leading US buyer of home loans, said on Tuesday it planned to sell US$6 billion of preferred stock to boost its financial cushion against a housing-related credit crunch.
The pricing of the transaction will be unveiled "in the near term," said Freddie Mac, a stockholder-owned corporation established by Congress in 1970 to support home ownership.
The company said it will offer perpetual preferred stock, shares that do not carry voting rights, including a smaller amount that will be convertible into regular shares.
"The capital raised through this offering will be used to bolster the company's capital base in light of actual and anticipated losses," the company said in a statement.
The company also said it would reduce its fourth-quarter dividend to US$0.25 per share, down from US$0.50 in the third quarter.
The mortgage finance giant announced a week ago worse-than-expected losses of US$2 billion in the third quarter, saying its investment portfolio had been hit by falling home values and tightening credit markets.