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Wells Fargo to Take $1.4 Billion Mortgage Hit

Wells Fargo, one of the few major banks that seemed to avoid much of the mortgage mess, revealed a $1.4 billion mortgage-related charge that will be recognized in the fourth quarter.

The losses are tied to home equity loans the company originated, an issue raised at the end of the third quarter when the bank reported a $153 million loss related to the out-of-fashion second mortgages.

The mortgage lender said it ended September with roughly $83 billion in home equity loans on its books and another $67 billion in first mortgages.

Wells Fargo said most of the expected loan losses are concentrated in an $11.9 billion bad bunch of high-risk home equity loans that the bank plans to liquidate, representing about 14 percent of the bank’s total home equity portfolio.

“Losses in this liquidating portfolio are currently expected to total approximately $1 billion over the course of 2008 and 2009 and are expected to diminish over time as the loans are resolved or repaid,” the bank said in a statement.

Yesterday, Wells Fargo announced that it was cutting much of its wholesale home equity production line, and today, the bank stiffened guidelines and cut loan-to-value limits on a number of retail non-conforming products (jumbo loans, etc).

“Given today’s uniquely challenging environment, we believe that sharpening our focus on our better-performing and relationship-based home equity loans is in the best long-term interest of our company,” chief executive John Stumpf said in a statement.

Now it may seem that no one is exempt from the mortgage crisis, but don’t lose hope.

Just two weeks ago, Warren Buffett increased his stake in Wells Fargo by 8.5 percent to 279.7 million shares, his second largest holding after Coca-Cola Co.

“Maybe people are going to be freaked out about Wells Fargo’s losses, but they shouldn’t be,” said Punk, Ziegel & Co. analyst Richard Bove. “Wells Fargo isn’t superhuman and they made some bad loans just like everyone else.”

Wells has clearly been one of the most conservative mortgage lenders over the last few years, steering away from high-risk loan programs when most others were soaking it up.

Shares of Wells Fargo closed up 34 cents to $29.83 Tuesday, but dropped $1.40, or 4.7 percent in after hours trading on the news.

Update: Moody’s said Wells Fargo’s portfolio provisioning is manageable, sending shares of its stock up $1.55, or 5.20%, to $31.38 in midday trading Wednesday.

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