Wells Fargo, once the No. 1 player in mortgages, is stepping back

Wells Fargo is stepping back from the multi-trillion dollar market for U.S. mortgages amid regulatory pressure and the impact of higher interest rates.

Instead of its previous goal of reaching as many Americans as possible, the company will now offer home loans only to existing bank and wealth management customers and borrowers in minority communities, CNBC has learned.

The dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and heightened regulatory oversight — both industrywide, and specific to Wells Fargo after its 2016 fake accounts scandal — led to the decision, said consumer lending chief Kleber Santos.

“We are acutely aware of Wells Fargo’s history since 2016 and the work we need to do to restore public confidence,” Santos said in a phone interview. “As part of that review, we determined that our home lending business was too large, both in terms of overall size and its scope.”

It’s the latest, and perhaps most significant, strategic shift that CEO Charlie Scharf has undertaken since joining Wells Fargo in late 2019. Mortgages are by far the biggest category of debt held by Americans, making up 71% of the $16.5 trillion in total household balances. Under Scharf’s predecessors, Wells Fargo took pride in its vast share in home loans — it was the country’s top lender as recently as 2019, according to industry newsletter Inside Mortgage Finance.

Now, as a result of this and other changes that Scharf is making, including pushing for more revenue from investment banking and credit cards, Wells Fargo will more closely resemble megabank rivals Bank of America and JPMorgan Chase. Both companies ceded mortgage share after the 2008 financial crisis.

Following those once-huge mortgage players in slimming down their operations has implications for the U.S. mortgage market.

As banks stepped back from home loans after the disaster that was the early 2000’s housing bubble, non-bank players including Rocket Mortgage quickly filled the void. But these newer players aren’t as closely regulated as the banks are, and industry critics say that could expose consumers to pitfalls. Today, Wells Fargo is the third biggest mortgage lender after Rocket and United Wholesale Mortgage.

As part of its retrenchment, Wells Fargo is also shuttering its correspondence business that sells mortgages through third-party companies and “significantly” shrinking its mortgage servicing portfolio through asset sales, Santos said.

The correspondence channel is a significant pipeline of business for San Francisco-based Wells Fargo, one that became larger as overall loan activity shrank last year. In October, the bank said 42% of the $21.5 billion in loans it originated in…