Bloomberg News

Wells Fargo Says SEC May Bring Case Over Mortgage Securities

February 28, 2012

Wells Fargo & Co. (WFC), the biggest U.S. home lender, was warned by federal regulators that it may face civil claims tied to the sale of mortgage-backed securities.

The bank received a so-called Wells notice from the Securities and Exchange Commission amid government inquiries into whether the company properly described facts and risks in offering documents, the San Francisco-based lender said today in the company’s annual report. SEC lawyers send the notices when they intend to recommend that the agency bring claims.

Almost four years after mounting mortgage defaults prompted unprecedented government bailouts of the financial system, regulators are still examining how banks packaged and sold home loans to investors. The SEC is looking for evidence that firms failed to disclose underlying credit weaknesses in mortgage pools and delinquencies, Jason Anthony, special counsel for the agency’s structured products unit, said last week without identifying companies under scrutiny.

Wells Fargo didn’t say when it got the SEC’s warning. Notice recipients are typically given a chance to dissuade the regulator from proceeding.

Government agencies are also looking at whether Wells Fargo may have violated fair lending laws or other regulations when making home loans, the bank said. The company is providing information requested by various agencies conducting investigations.

Wells Fargo rose 34 cents to $31.36 in New York, giving the bank a gain of 14 percent this year.

Foreclosure Settlement

Wells Fargo, whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc., said losses from all litigation it faces could amount to as much as $1.2 billion beyond reserves. That figure, as of Dec. 31, is down from $1.6 billion in the third quarter.

The company was among five mortgage servicers that agreed this month to a $25 billion settlement of state and federal probes into shoddy foreclosure practices. The deal allowed regulators to continue pursuing the industry over claims regarding the packaging of loans into securities.

Wells Fargo’s share of the settlement totals $5.3 billion, including $3.4 billion in consumer relief programs, $1 billion paid directly to the federal government and states and $900 million for a refinancing program, the bank said at the time.

The settlement’s refinancing portion will cost $720 million in lost interest income and the bank will earn $180 million in credit from the government, Wells Fargo said in the report. The commitment will mean refinancing 20,000 mortgages with an unpaid principal of $4 billion, the bank said.

Soured Mortgages

Well Fargo also boosted its estimate for the possible additional cost of buying back soured mortgages to as much as $2.1 billion from $1.9 billion in the third quarter. It represents the lender’s estimate of costs beyond what’s already in reserve and reflects what’s reasonably possible, rather than what’s probable, according to the document.

Investors who buy loans are entitled to ask for refunds or compensation if they find missing or inaccurate data on home values or the borrower’s income. Since the start of 2007, faulty lending and foreclosures have cost the five biggest U.S. home lenders more than $72 billion, with at least $5.98 billion attributed to Wells Fargo, according to data compiled by Bloomberg.

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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