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Foreclosure Litigation Cost Wells Fargo $428M in Second Quarter

""Wells Fargo"":http://www.wellsfargo.com says its second quarter expenses included $428 million of operating losses, substantially all driven by litigation accruals for mortgage foreclosure-related matters.


Loan losses, though, were down substantially, supporting a 29 percent increase in net income to $3.9 billion, or 70 cents per share, for the three-month period. That's up from a profit of $3.1 billion in the second quarter of 2010 and $3.8 billion for the first quarter of 2011.

Timothy Sloan, CFO of the California-based lender, says Wells Fargo has undertaken an expansive expense initiative dubbed Project Compass, focused on ""removing unnecessary complexity and eliminating duplication"" in order to improve the customer experience and internal workflow.

One of three focus areas of the initiative is the mortgage default area. Sloan says expenses associated with loan resolution, loss mitigation, and foreclosed assets should decline as the credit cycle improves.

""At the same time,"" he says, ""process improvements can also be made in this area, such as automating asset tracking and payment processing and centralizing certain functions.""


In the company's conference call with investors Tuesday, Sloan highlighted what he described as a servicing portfolio that ranks ""among the best in the industry.""

Wells Fargo's services $1.8 trillion in residential mortgages, 69 percent of which is serviced for Fannie Mae and Freddie Mac. Only 6 percent are private securitizations where Wells originated the loans.

""As a reminder, the characteristics of our non-agency securitization portfolio are different from our larger peers,"" Sloan said. ""Eighty percent were prime origination, 58 percent are from pre-2006 vintages, there is an insignificant amount of home equity and there are no option ARMs.""

As of June 30, 2011, approximately 695,000 active trial or completed loan modifications had been initiated by Wells Fargo since the beginning of 2009. Of this total, 85 percent were through the company's own modification programs and the rest were through the Home Affordable Modification Program (HAMP). Sloan says Wells has forgiven over $4 billion of principal.

""Credit quality continued to improve in the second quarter, our sixth consecutive quarter of declining loan losses and the third consecutive quarter of lower nonperforming assets,"" said Mike Loughlin, chief risk officer.

Second quarter net charge-offs were $2.8 billion, or 1.52 percent (annualized) of average loans, down from $3.2 billion in the first quarter.

Loughlin said the decline in charge-offs was driven by lower losses in virtually every loan category as delinquency trends continued to show improvement.

Wells Fargo's total outstanding loan repurchase demands are down in both number and balances for the fourth consecutive quarter. Losses on repurchases also declined from $331 million in the first quarter to $261 million in the second quarter.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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