Wells Fargo & Co., the largest U.S. home lender, has assigned about 400 underwriters to originate mortgages for the bank to hold, with as many as 40 percent of those loans likely to fall outside government guidelines taking effect this week.
The bank is training the group as a way to increase lending without losing control of quality, according to Brad Blackwell, head of portfolio lending for the San Francisco-based lender. The group will review loans including those with terms that prevent them from qualifying for protections provided by the Consumer Financial Protection Bureau, or CFPB, under new rules, he said.
Wells Fargo, responsible for about one in five U.S. mortgages last year, is pushing the initiative to compete for clients seeking non-conventional loans such as those with interest-only payments. That segment will be increasingly sought-after at a time when rising interest rates are curbing borrowing demand and banks are facing the biggest regulatory overhaul since the Great Depression.
“As rates continue to rise and refinancing volume continues to contract, lenders are going to be looking for a way to keep their staffs busy,” said Erin Lantz, director of mortgages at Zillow Inc.
Congress directed the CFPB, formed as part of the 2010 Dodd-Frank Act, to create the qualified mortgage rule after banks were blamed for helping spark the 2008 credit crisis by giving mortgages to people who couldn’t afford them. The regulations provide a measure of legal protection to banks that meet guidelines and expose them to legal liabilities if the loans charge high fees or require total debt payments exceeding 43 percent of the borrower’s income.
“What you see happening on Jan. 10 is the most sweeping re-regulation of mortgage finance that I’ve seen,” said Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association, whose home loan career started in 1983.
Unlike the loose lending practices of the last decade, most lenders now approve borrowers only after fully documenting their incomes and assets. At a time when government-backed loans account for 90 percent of the market, non-qualified mortgages can’t be insured by the Federal Housing Administration or sold to Fannie Mae or Freddie Mac, the government-controlled enterprises that package home loans into bonds.
Wells Fargo wants to give its clients more loans that can’t be sold to the government-backed firms. The bank is confident the new underwriting group, which will make both qualified and non-qualified mortgages, will allow it to originate debt that doesn’t meet the CFPB’s safe harbor, said Blackwell. Non-qualified mortgages could be between 25 percent to 40 percent of the bank’s total nonconforming loans, or about 5 percent of all mortgages, he said. Nonconforming loans are those that can’t be sold to Fannie Mae or Freddie Mac.
The approach represents a change for the bank, which long made loans with the intention of selling them all.
“In the early days of our history, we were a mortgage bank: our primary responsibility was to originate and sell,” Blackwell said. “Today we are originating for our portfolio. These are loans that we will hold for their lifetime.”
Wells Fargo added $14.5 billion in nonconforming mortgages in the six months ended September, bringing the total held by the bank to $72.4 billion, according to a bank presentation.
Bank of the West, a subsidiary of BNP Paribas SA, also plans to offer non-qualified mortgages to its clients regardless of amount, according to Stew Larsen, executive vice president of the mortgage banking division based in Omaha, Nebraska. The rules are an opportunity for banks that have capacity to hold loans on their balance sheets to take market share from mortgage companies that lack that capability, he said.
Non-qualified mortgages have the potential to be a $400 billion a year market, starting with the most creditworthy borrowers and broadening as home values and the wider economy improve, according to Raj Date, who stepped down as deputy director of the CFPB a year ago to found Fenway Summer LLC, which plans to offer non-conforming loans in 2014.
Lenders are responding to mortgage volumes that are forecast to plunge 33 percent this year to $1.17 trillion from 2013, according to the Mortgage Bankers Association. Rates on 30-year mortgages averaged 4.53 percent last week, up from 3.35 percent in early May, according to Freddie Mac.
The rate increased when the Federal Reserve signaled plans to reduce $85 billion in monthly bond purchases and already has diminished the refinancing that accounted for two-thirds all home loans in the last two years.
Declines in refinancing have led the largest lenders to start cutting jobs. JPMorgan Chase & Co. said it may dismiss 15,000 employees, Wells Fargo cut more than 6,200 positions and Bank of America Corp. eliminated at least 3,400 mortgage-related workers. Citigroup Inc. also said it’s looking to trim staff.
Banks are being cautious about testing the limits of the new rules as they continue settling disputes arising from the last decade’s lending spree.
JPMorgan, which agreed to pay $5.1 billion in October to resolve claims by Fannie Mae and Freddie Mac about debt sold to the financing companies, has no plans to expand or discontinue products after Jan. 10, including non-qualified mortgages for borrowers with a high-net worth, according to Amy Bonitatibus, a spokeswoman for the New York-based bank.
Bank of America will continue providing interest-only loans to “preferred customers in a very conservative manner,” according to bank spokesman Terry Francisco.
Citigroup will offer some loans such as adjustable-rate mortgages and those too large to qualify for agency guidelines, according to Mark Rodgers, a bank spokesman. The loans will only be made when they are “appropriate and suitable” for borrowers, he said.
The new rules will help protect consumers and reduce the risk that the economy will crash again because of shoddy lending, Senator Elizabeth Warren, a Democrat of Massachussetts, said yesterday.
“The rules will reshape the mortgage market for the better,” Warren, who first proposed creating the CFPB, said during a floor speech. “They will give people a better chance to buy homes and a better chance to keep those homes, and they will force mortgage lenders and servicers to compete by offering better rates and customer service, not by tricking and trapping people. ”
While lenders initially will be reluctant to extend non-qualified mortgages to borrowers with lower incomes, limited assets or low credit scores, they will probably stretch the rules as they seek to expand business, just as they began offering loans to subprime borrowers in the last decade, according to Richard Eckert, an MLV & Co. analyst who worked as a risk management analyst at the Federal Home Loan Bank of San Francisco in the 1990s.
“Just like back in the early 2000s, to keep the party rolling they slipped into subprime,” he said. “People that were high and mighty and were going to take the high road a year ago when quarterly loan originations were $400 billion and now seeing those dry up to as little as $150 billion, I think they are taking a real hard look at what they may have passed up.”
Even as it cuts mortgage jobs, Wells Fargo has selected between 300 and 400 underwriters who will execute different policies and report to separate bosses than peers who check over loans the bank sells to investors, Blackwell said in a telephone interview.
“We have separated the underwriting group into a separate team that only underwrites loans” for the bank’s own balance sheet, he said. “We found it impossible to achieve our objectives” with the two groups together, he said.
The underwriters will be located in six locations around the country and the training of the group and policy writing will be completed by the end of the year, Blackwell said. Tim Disbrow, head of west-coast underwriting and fulfillment, will oversee the effort.
This may lead to faster closing times and fewer mistakes, according to Joseph Morford, an RBC Capital Markets analyst based in San Francisco. That should build trust with the company’s financial advisers and private bankers, who are expected to refer wealthy customers, he wrote in a Dec. 23 note to clients.
“The brokers should feel more comfortable that their customers will be handled appropriately, which over time should lead to more mortgage referrals,” Morford wrote after meeting with David Carroll, head of Wells Fargo’s wealth and retirement unit.
Already, the new policy has “allowed us to do more volume with better service and better quality,” Blackwell said.