Wells Fargo Chairman Richard Kovacevich said Wednesday the U.S. mortgage industry will recover following further short-term pain, led by better-diversified lenders less exposed to market vagaries.
Kovacevich said current market turmoil may have a "way to go," boosting the premiums that investors demand to take on perceived credit risk.
"We have been waiting for war, pestilence and famine, and it looks like it has arrived," Kovacevich said at a Bank of America conference in San Francisco monitored by Webcast.
But he said prices on many securities have improved, and that once the market settles down, mortgage lenders will resume making home loans that many investors now won't buy.
San Francisco-based Wells Fargo , the nation's fifth-largest bank and second-largest mortgage lender, has largely escaped troubles afflicting rivals such as the largest mortgage lender, Countrywide Financial.
The bank in not overdependent on capital markets for funding, and never made many of the exotic loans that have led to rising defaults and spooked investors.
Profit totaled $4.52 billion from January to June, up 11 percent from a year earlier. Through Tuesday, Wells Fargo shares were up 4.6 percent this year, compared with a 6 percent drop in the Philadelphia KBW Bank Index. Warren Buffett's Berkshire Hathaway is its largest investor.
California 'Pretty Ugly'
The housing slump first affected "subprime" lenders, which lend to people with poor credit, but spread to providers of "nonconforming" home loans that Fannie Mae and Freddie Mac do not buy.
Such loans are often prime, or "Alt-A," that is, for people with small credit problems or who cannot document income or assets.
Dozens of mortgage lenders, including subprime specialists New Century Financial and NovaStar Financial and Alt-A specialists American Home Mortgage Investment and Impac Mortgage Holdings, have halted nearly all lending this year or gone bankrupt, or both.
"The nonconforming market will be back in no time at all," Kovacevich said. "If you were worried that that's going away, don't worry. Trust me."
But he said "monoline" lenders with few revenue sources won't be the leaders. "They all have gotten killed enough where a light goes on and you say, it doesn't make sense any more," he said.
In California, a focal point for investors because of elevated home prices in many markets, the environment is "pretty ugly at the moment," but it will right itself, Kovacevich said.
"Silicon Valley is actually booming. Los Angeles is extremely diversified," he said. "It's just so difficult to build houses, find land and so on, that you don't have a huge overhang. ...If you've got development rights and property in this state, you're going to be just fine. Over time."
Market turmoil may lead to more bank mergers, though Kovacevich agreed with comments this month by chief executives from Winston-Salem's BB&T and Cleveland's KeyCorp that asking prices are too high.
"They're moving in the right direction, in terms of lower prices," Kovacevich said. "Because the environment is going to get tougher over the next year, it is likely more deals are available. Definitely more deals will be done in the next two years than over the last two years."
Kovacevich reaches Wells Fargo's retirement age of 65 next year. John Stumpf replaced him as chief executive in June.
Wells Fargo shares were up 24 cents to $37.43 in afternoon trading on the New York Stock Exchange.