Wells Fargo & Co.’s grip on the U.S. mortgage market has tripped alarms among regulators and lawmakers concerned that the bank’s control over one of every three new loans could hurt consumers and undermine markets.

Wells Fargo and its two largest rivals, JPMorgan Chase & Co. and U.S. Bancorp made half of all U.S. home loans in the first six months, according to Inside Mortgage Finance, an industry publication. Wells Fargo alone controlled 33.1 percent. In mortgage servicing, which involves billing and collections, four firms have 50 percent of the business, and Wells Fargo is No. 1 in that field, too, with 18.5 percent.

The concentration in the mortgage business has drawn warnings from the inspector general for Fannie Mae and Freddie Mac, the head of Ginnie Mae, Fitch Ratings, and congressmen, including one from Wells Fargo’s home state, about growing risks to borrowers, taxpayers, investors, housing markets and the financial system. Scenarios include a setback or strategy shift at Wells Fargo that could choke off credit for homebuyers and compel the United States to again pump in money to keep the housing market from seizing up.

“A concentration of issuers creates an oligopoly,” said Bill Frey, head of Greenwich Financial Services LLC in Greenwich, Connecticut, whose firm invests in, creates and trades mortgage bonds and advises bondholders. The result will be “higher mortgage costs for generations, as well as slower economic growth. Housing is the keystone of our economy.”

Market Disruptions

As recently as the 1990s, a company with 7 percent market share would have been considered a large player in a market that was broadly distributed among savings and loans, community banks, credit unions, mortgage brokers and commercial banks, according to David Stevens, chief executive officer at the Mortgage Bankers Association and a former official in the U.S. Department of Housing and Urban Development.

Wells Fargo, led by chief executive officer John Stumpf, 58, controlled 15 percent of the market in 2007, before the financial crisis triggered by falling home prices and souring mortgages hobbled rivals such as Bank of America Corp. and Citigroup Inc.

“The nation benefits from a broadly distributed mortgage-finance system,” said Stevens, whose organization represents more than 2,400 firms involved in housing. “If the market is too concentrated on one company, and if they were to change their strategy around mortgage originations or got into financial trouble and had to leave the market altogether you could have market disruptions.”

‘Strategic Vision’

Officials aren’t suggesting that Wells Fargo did anything improper to emerge as the biggest player in mortgages, or that the San Francisco-based bank, ranked fourth by assets in the United States, is putting its own soundness at risk.

Instead, as they seek to avoid another financial crisis, regulators’ focus is on what might happen if Wells Fargo’s enthusiasm wanes for housing, which comprised almost a fifth of the U.S. economy in more prosperous years. Last month, the bank said it will stop funding loans originated and sold by independent mortgage brokers.

“The home lending business is a key part of Wells Fargo’s strategic vision for the future,” Vickee Adams, a bank spokeswoman, said in an emailed statement. “We have always taken a longer-term view of the home lending business and we have succeeded by lending responsibly to customers, one at a time.”

Cowboy Dress

Adams said the lender should be judged by its share of the retail channel, 16.3 percent in the first quarter, rather than the entire business, which also involves buying loans from small- and medium-sized lenders. In January, sales managers in the San Francisco Bay Area dressed as cowboys to urge retail loan officers to reach for 40 percent of the new-home purchase market, according to two attendees who asked that their names not be used because they weren’t authorized to speak publicly.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has said he’s concerned about concentration and urged officials in a May speech to consider changes. Freddie Mac — with Fannie Mae, the recipients of nearly $190 billion in government aid — bought 82 percent of the single-family loans it purchased in 2011 from 10 firms, filings show, with 40 percent from Wells Fargo and JPMorgan.

Fannie Mae and Freddie Mac rely on Wells Fargo and other large servicers to collect payments for the loans they guarantee. That makes them vulnerable to the business practices and financial health of a few large banks, said Steve A. Linick, the Federal Housing Finance Agency’s inspector general. The top 10 serviced 75 percent of single-family mortgages guaranteed by Fannie Mae, according to company filings.

Safety and Soundness

“A limited number of servicers poses a safety and soundness risk to the enterprises,” Linick said in a phone interview. This “ultimately could cause losses to taxpayers.”

The effect on servicing has also drawn the attention of Ted Tozer, president of Ginnie Mae, a government-owned corporation that guarantees mortgage bonds holding loans backed by the Federal Housing Administration and other agencies.

“If the quality of servicing deteriorates, you have to deal with it and that puts a lot of oversight responsibility on us, no question about it,” said Tozer, whose Washington-based operation guarantees more than $1 trillion of mortgage-backed securities. “That’s one of the big challenges.”

Higher Costs

Corinne Russell, a spokeswoman for the FHFA, declined to make DeMarco available for an interview. In a May 15 speech in Washington, he said policymakers “need to think hard” about how regulations have contributed to the current environment, and consider ways to broaden the market.

Amy Bonitatibus, a spokeswoman at New York-based JPMorgan, declined to comment, as did Tom Joyce at Minneapolis-based U.S. Bancorp. JPMorgan ranks first by assets in the U.S. among commercial lenders and U.S. Bancorp is fifth.

Spokespeople for the Federal Reserve and the Office of the Comptroller of the Currency, which regulate banks, also declined to comment.

Aside from the impact on Fannie and Freddie, lawmakers and consumer advocates say the lack of options for mortgage credit is causing borrowers to pay more than they should. Lenders reported $13.7 billion in mortgage-banking income through the first six months, according to IMF, the industry publication. That was capped by Wells Fargo’s record $2.89 billion income in the second quarter on $131 billion in loans.

“To the extent there is a lack of competition, that’s costing homeowners money,” Rep. John Campbell, a California Republican on the House Financial Services and Budget committees, said in a phone interview. “As low as interest rates are, I’d argue they could be lower.”

Consumer Cost

Federal Reserve officials have driven down interest rates to make it cheaper for consumers and businesses to borrow. The average rate on a 30-year fixed-rate mortgage fell to a record low of 3.49 percent in the week ended July 26, according to Freddie Mac. Further efforts to reduce rates may fall short because, despite the profits, lenders have been slow to add capacity, Morgan Stanley analysts led by Vipul Jain wrote in an Aug. 3 report.

Even at current rates, Campbell said, the housing recovery — which he considers central to a U.S. economic revival — has been sluggish. Home prices in 20 cities fell 0.7 percent in May from a year earlier, according to the S&P/Case-Shiller index. While that’s the smallest 12-month decline since September 2010, prices are still 33 percent below the 2006 peak.

Since 1975, home purchases, new home construction and remodeling has accounted for almost 18 percent of U.S. economic output, according to the National Association of Home Builders, which cited government data. That figure fell to less than 15 percent in the first quarter.

Not Sustainable

While the home sales would have been worse without Wells Fargo, and to a lesser extent JPMorgan or U.S. Bancorp, it’s not sustainable, Campbell said.

U.S. officials including DeMarco haven’t taken large-scale steps to reduce Fannie Mae and Freddie Mac’s reliance on a few firms, and Campbell said he hasn’t taken up the issue with the government mortgage firms.

Wells Fargo’s leading market share isn’t likely to draw the ire of antitrust monitors, at least not yet, according to Makan Delrahim, an attorney at Brownstein, Hyatt, Farber, Schreck LLP and a former attorney at the Department of Justice’s antitrust division. The United States doesn’t track explicit market-share thresholds, meaning a firm can control 90 percent market share if it gets there by offering better products or services and not by unduly taking advantage of its market position, he said.

Buffett Approval

Wells Fargo’s own health probably isn’t at risk, either, according to analysts. The bank’s reputation for management has been burnished by having billionaire Warren Buffett’s Berkshire Hathaway Inc. as its biggest shareholder, at least a decade-long track record of posting annual profits, and its history of avoiding some of the industry’s worst underwriting practices.

In 2010, the Securities and Exchange Commission showed that Paulson & Co. had rejected subprime mortgage bonds from Wells Fargo when it was trying to find assets that the hedge fund could bet against. The reason: the quality of the underlying loans was too good.

“Wells did the best job of the big players in the mortgage market and therefore they’ve garnered share as the other fellows have fallen by the wayside,” Buffett said in a July 13 interview. “They’ve got a sensational mortgage operation.”

Bank executives also pride themselves on the diversity of their revenue sources, often highlighting the reduced risk in having more than 80 businesses. The second-quarter earnings supplement included a slide titled “continued strong diversification” that showed 10 sources of fee revenue.

Systemic Effect

“We believe because of the diversification and because of the vision that we have for the company that we can perform in almost any environment,” Chief Financial Officer Timothy J. Sloan said at a June 12 investor conference. Sloan has also said its “debatable” whether Wells Fargo belongs on regulatory lists of the largest global banks required to hold extra capital because their failure could threaten the financial system.

Still, the growth in mortgages has started to challenge thresholds long cited by former Chairman and CEO Richard Kovacevich, who said a diversified bank would have no business that’s more than 10 percent of revenue over an economic cycle. Mortgage banking was 13.6 percent in the second quarter. Servicing and origination accounted for 29 percent of fees.

Credit Rating

The rise may dent the bank’s credit, according to Fitch Ratings. The firm said last month that Wells Fargo’s rating of AA-minus, with a stable outlook, may be pressured if it doesn’t reduce its mortgage dealings. Fitch said it expects the concentration to moderate over time, and swaps traders pay the smallest premium among the six largest U.S. banks to protect the company’s debt against losses.

Rep. Brad Miller would welcome the moderation, said the North Carolina Democrat, whose state hosts some of the former Wachovia Corp. operations bought by Wells Fargo in 2008. Miller said in a phone interview that he’s “very concerned” about the concentrated mortgage market, and has introduced legislation that would cap the size of the biggest banks.

“It appears that Wells is inheriting the market because the other banks are putting their energies into other things,” said Miller, a member of the Financial Services panel.

For now, regulators and lawmakers are more focused on keeping money flowing into home loans and are unlikely to force change, according to Bart Naylor, who works on financial policy at Public Citizen, a Washington-based advocacy group.

“To the extent a regulator wants there to be a thriving mortgage market,” they may defer to the largest lenders, Naylor said. “However, they should be cautioned that leading market share has led to oblivion.”