In the wake of its recent $1.2 billion settlement with the government, whereby Wells Fargo admitted to deceiving the government into insuring thousands of risky mortgages (yet nobody went to jail), the bank has decided to break with the Federal Housing Administration and offer its own minimal down payment mortgage program.
The new program partners with Fannie Mae in order to allow borrowers with credit scores as low as 620 to make as little as a 3% down payment and use income from family members or renters to qualify. Naturally, the intent is to make more loans to low and middle-income borrowers – in the process pushing up home prices countrywide – without going through the FHA.
As a reminder, the FHA insures mortgages made to buyers who would otherwise have a hard time getting loans, but it has been shunned by banks following a wave of lawsuits by the Justice Department that alleged poor underwriting.
Wells Fargo made $6.3 billion in FHA-backed loans last year, and is a top 20 originator for the FHA according to the WSJ. It’s not just FHA however: as we have shown previously, Wells’ own mortgage origination pipeline has been slowing down in recent years, and as such the corner office of the country’s largest mortgage originator is desperate to find new and innovative ways to boost lending.
After being called out for its deceptive practices, the bank has scaled back on FHA backed mortgage lending in recent years. Wells Fargo accounted for just 2.5% of total FHA mortgages in 2015, down from 13% in 2010, and ultimately coming to this end game where the bank has a path forward without the FHA.
Self-Help Ventures Fund, based out of Durham, NC will now be taking the default risk on these low down payment mortgages originated by Wells Fargo.
Self-Help comprises a state and federally chartered credit union as well as the ventures loan fund, and has a total of $1.6 billion in assets. The “fund” has been partnering with Bank of America on insuring loans from their low down payment loan program since February, and has said it is on track to make between $300 million and $500 million in its BofA mortgage product within the first year.
As the WSJ explains, the new Wells Fargo product could save borrowers money
The new Wells Fargo product might save money for some borrowers who would have otherwise taken out an FHA-backed loan. For example, a borrower who buys a $200,000 home and has a credit score of 715 would pay about $1,040 a month with an FHA loan from Wells Fargo, assuming the borrower includes the FHA program’s upfront costs in the loan amount and makes a 3.5% down payment, the minimum the agency requires. The same borrower under the new program would pay about $994 a month with a 3% down payment.
By taking a housing-education course, the borrower could reduce the mortgage rate by an additional one-eighth of a percentage point, making the payment about $979 a month.
Fannie Mae Vice President of Product Development Jonathan Lawless expects other lenders to develop such programs as well, and that he expects the volume of low down-payment mortgages that Fannie backs to grow.
In summary, Wells Fargo didn’t like being taken to task on its deceptive actions and has decided to continue with risky mortgage origination, but shifting the risk to Self-Help instead of the FHA. This sounds like another New Century style lending blowup in the making, only this time one where there is a far more ambiguous relationship with the sponsor bank, in this case Wells Fargo.
Of course, the fact that the loans will be purchased by Fannie Mae means that the risk is still ultimately on the taxpayer if Self-Help is overwhelmed with defaults as happened during the last bubble, so one can probably say that the problem of taxpayers being once again exposed to risky subprime lending practices has just returned with a vengeance.