Wells Fargo the largest subprime originator in 2007: FCIC transcript interview

Report by Josh Zachariah from Gurufocus website:

Listening to David Einhorn's testimony on the Financial Crisis Inquiry Commission, I was shocked to hear a statement Einhorn made about Wells Fargo. While he was discussing his short position in MBIA Einhorn, he listed the major subprime players in 2006, and the largest originator was Wells Fargo. Even the interviewer had to have him repeat that vexing statement. Wells Fargo has generally been considered the shining spot in the mortgage business during the housing boom. I previously  wrote an article describing Wells and its disciplined lending. Wells was indeed listed as the top subprime originator by Insider Mortgage Finance in February, 2007. Just one month later the company fell to 9^th place on the list.

It turns out Wells was using a different method to gauge its subprime presence. Wells generates revenue from originating mortgage loans, but they also make money servicing them by collecting fees. The company may hold the loan and service it, or the loan may be held by other investors and Wells just services it by collecting monthly payments and performing other duties on behalf of the investor. This was the case in their subprime exposure.




Wells apparently included these servicing rights for subprime loans in late 2005 to February 2007. They didn’t hold the actual loan and thus would not be exposed to any write-downs should the mortgagor default on the loan. At worst, this stream of revenue would evaporate if the home went into foreclosure. As I wrote earlier, Wells claimed to have left the subprime market in 2003, but that appears to be tongue-in-cheek.

In an interview with John Stumpf in 2007, the CEO acknowledged the subprime portfolio making up 10% of its $1.4 trillion portfolio. He would also admit to various teaser loans where low introductory rates were followed by high long-term rates. Again these types of subprime loans were just over 1.5% of its total portfolio. It was not a significant exposure, but Wells may deserve a slightly less flattering image than they’ve been receiving.

You can listen to the interview here: David Einhorn, Greenlight Capital • MP3

Here is a partial transcript with the interview with David Einhorn:

Interviewer:
And generally, do you recall whatcompanies you found to be most vulnerable? Of course we all knowabout Lehman.

David Einhorn:
Yeah, I think the ultimate list wouldbe something close to Lehman, Bear,MBIA, Ambac, Moody’s, Wells Fargo,HSBC.


Interviewer:
So the one to me anyway that sort of sounds curious out of that list is Wells. How come, do you recall why they were on the list? I didn’t know that they had a big subprime or real estate mortgage exposure.


David Einhorn:
Wells is actually the number one originator of subprime mortgages in 2006, according to the industry statistics. Now they subsequently denied that they ever originated asingle subprime mortgage, which is interesting. It’s inconsistent with what happened in 2006.


Interviewer:
Right, okay.


David Einhorn:
I knew this when I was on the board of New Century. I mean Wells was right there as a top competitor.


Interviewer:
You know I know I have this but I just don’t know off the top of my head, howlong were you on the board of NewCentury? Do you remember when you joined it and when you left?


David Einhorn:
Yeah, it was less than a year

Einhorn left New Century board. He resigned in 2007. Click here to read more. Here is the entire transcript of the interview:

Transcription of David Einhorn's Interview with the Financial Crisis Inquiry Commission