Wells Fargo buying more ‘sub-prime’ mortgages
At a time of pinched profits in the mortgage industry, Wells Fargo & Co. is increasing its lending to risky borrowers -- betting that they will sign up for additional services such as checking accounts and credit cards.
Wells Fargo this year leaped ahead of Orange-based Ameriquest Mortgage Co., Irvine-based New Century Financial Corp. and other rivals to become the biggest funder of so-called sub-prime mortgages. Such loans go to customers who can’t qualify for the best terms because of imperfect credit, heavy debts or other reasons.
In a strategy it plans to announce today, the San Francisco-based banking giant said it would automatically enroll these borrowers in a financial education program that would include free consultations in English or Spanish with specialists who can help them create financial plans and try to clean up their credit.
It’s the most comprehensive such program ever offered to borrowers in the sub-prime market, said Stephanie Christie, a senior vice president at Wells Fargo Home Mortgage.
The program, dubbed Steps to Success, would help address advocacy groups’ allegations of predatory lending at Wells’ sub-prime lending subsidiary, Wells Fargo Financial, which has 19,000 employees and operates out of nearly 1,300 offices in the U.S., Canada and Latin America.
But company executives and analysts said it also would provide Wells an opportunity to engage in the “cross-selling” characteristic of its marketing. For example, the educational program will advise that borrowers can improve their credit by paying mortgages and other bills automatically -- which requires having a bank account.
“Nobody over time has demonstrated a more focused strategy of cross-selling than Wells Fargo,” said analyst R. Scott Siefers of Sandler O'Neill Partners in New York.
“To the extent that this program makes it easy for sub-prime borrowers to understand complicated financial products and get to feel you are someone they can trust and rely on, it’s a lot easier to sell them other financial products.”
Wells’ push into sub-prime lending comes as many companies are retreating from the business, where profit margins have shrunk amid higher interest rates, a slowing housing market, tough competition and increased regulatory scrutiny. Siefers said the strategy was designed to produce a long-term increase in Wells’ share of the mortgage market, a core sector for the company.
Early last year, Wells Fargo was No. 7 in originating sub-prime mortgages, according to National Mortgage News. The trade publication calculated that Wells moved into the No. 1 slot by tripling its investment in sub-prime mortgages to $43.7 billion during the first half of this year, mostly by buying loans from other lenders.
The sub-prime mortgage market has been a frequent target for consumer and advocacy groups, which contend that the industry has often victimized unsophisticated customers by charging them excessive fees and interest rates, talking them into loans they can ill afford and promising favorable terms that are replaced by onerous provisions at the last moment.
The national advocacy group Assn. of Community Organizations for Reform Now, or ACORN, has had a federal lawsuit pending for three years against Wells Fargo in San Francisco, alleging among other things that borrowers nationwide who could have qualified for prime loans from Wells Fargo Home Mortgage wound up stuck with costly sub-prime loans merely because they went to Wells Fargo Financial.
Since the suit was filed, Wells has addressed many of ACORN’s concerns, notably by making prime loans -- mortgages with better terms than those on sub-prime loans -- available at the finance company, said Jordan Ash, director of the organization’s Financial Justice Center
Ash said he didn’t know the details of Wells’ new program but said it sounded good on its face: “If it is geared at helping people get to the point where they could refinance into a prime loan, whether with Wells or somebody else, we’d support it,” he said.
John Taylor, president of the National Community Reinvestment Coalition, said he hoped other lenders followed Wells Fargo’s lead.