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Wells Fargo expects to make fewer U.S. home loans this quarter

A Wells Fargo sign is seen outside a banking branch in New York July 13, 2012. REUTERS/Shannon Stapleton

By Peter Rudegeair

(Reuters) - Wells Fargo & Co, the largest U.S. mortgage lender, expects to make 30 percent fewer home loans this quarter due to rising interest rates, its financial chief said on Monday.

The expected decline underscores how rising U.S. mortgage rates are cutting in to banks' profit. Wells Fargo's shares were down 1.2 percent at $40.94 on Monday morning.

The fourth-largest U.S. bank estimates it will make $80 billion of home loans in the third quarter compared with the $112 billion it made in the second quarter, Chief Financial Officer Tim Sloan said at a conference hosted by Barclays Plc in New York.

That would mark the first quarter since mid-2011 that Wells Fargo did not make at least $100 billion in home loans.

Customers' demand for refinancing their home loans has fallen 63 percent from the peak in early May, according to the Mortgage Bankers Association refinance index.

As mortgage revenue declines, the bank is cutting costs in the business, a process that usually takes one to two quarters, Sloan said. On August 21, the bank announced it would lay off 2,300 employees in its mortgage unit as higher interest rates were causing refinancing activity to slow.

The San Francisco-based bank made more than one of every five U.S. home loans in the second quarter and collected payments on nearly as many, according to Inside Mortgage Finance, an industry publication.

Wells Fargo believes its profitability is not solely tied to the mortgage lending business. The bank boosted its earnings per share in each of the previous 14 quarters, and in six of them mortgage origination revenue declined, Sloan said.

Gains elsewhere at Wells Fargo could help offset the declines in mortgage income. The bank expects to release more in loss reserves than the $500 million it released in the second quarter, thanks to improved credit performance, Sloan said.

Wells Fargo also added $15 billion in securities to its investment portfolio to take advantage of rising bond yields, which should boost interest income.

Meanwhile, the bank is looking to boost capital levels by 1 percent after declines in the value of some of its investment securities weighed on its regulatory capital ratios, Sloan said. He did not specify how the bank was looking to increase capital levels.

(Editing by Matthew Lewis)