Analysts stunned by Wells Fargo’s home equity loan problems

Carbon fiber demand a boost at Zoltek [St. Louis] Wells Fargo s decision to set aside $1.4 billion as a special provision for anticipated loan losses in the riskiest portion of its home equity loans surprised analysts. Some analysts quickly cut their earnings expectations and price targets for the San Francisco bank, but often maintained their favorable ratings on company s shares.

The special provision has tarnished Wells Fargo s image in the eyes of some, while other analysts wonder how bad things will get at other banks if such a large set-aside is occurring at Wells, with its conservative lending reputation. What is particularly disappointing about this incident is that observers of this company never expected Wells to be making these types of loans in the first place, said Dick Bove, an analyst with Punk Ziegel Co.

It s going to take some time for Wells to repair the damage to its reputation. The bank made the special provision for the $11.9 billion in home equity loans it placed in a liquidating portfolio. Many of these loans were made through the wholesale channel as part of a home financing that was 90 percent or greater of the home s value, made in the wholesale channel in a financing in which Wells didn t hold the first mortgage or home equity loans acquired in the correspondent channel.

The bank is tightening its underwriting standards and no longer willing to accept any of these type of loans through third-party channels.