downturn tarnishes Wells Fargo's conservation reputation

--Mr. Cannon calculates that Wells had nearly 17% of its loan portfolio in home-equity loans at the end of the third quarter, compared with about 9% overall for the 10 biggest banks. He also sees risk in the bank's big servicing business, as more borrowers default on their payments. --Wells traditionally reduced the risk inherent in home-equity loans by making them only to customers who already had a Wells Fargo first mortgage. --But, as more aggressive rivals cut into Wells's markets over the past several years, Wells adopted a riskier approach of making home-equity loans through brokers whose customers didn't have any prior relationship with the bank. --That turned out to be a mistake, Mr. Kovacevich admits. The loans have gone bad at a much higher rate than similar loans made to Wells's own clients. --Wells's business is concentrated in Western states where a high proportion of mortgages overall were interest-only or option ARMs, says James Ellman, president of San Francisco hedge fund Seacliff Capital, which invests in financial stocks but currently holds no position in Wells Fargo. In Arizona, California and Nevada in 2005, for example, such loans made up at least half of subprime loan originations that were securitized, according to a report from the Federal Deposit Insurance Corp. --Last month, Wells said it would pool $11.9 billion of its riskiest home-equity loans for liquidation, and take a $1.4 billion special provision in the fourth quarter to cover expected losses. But the bank still has $71.5 billion in home-equity loans on its books. Wells says nearly all were originated by the bank's own retail team, but about $22 billion are in a second-lien position behind a non-Wells Fargo mortgage -- typically, a higher risk type of loan.