Wells to rein in home lending
Financially strapped homeowners got another dose of bad news Thursday: The country’s second-largest mortgage lender said it would stop issuing sub-prime loans through independent brokers.
San Francisco-based Wells Fargo & Co. said such loans, made to borrowers with spotty credit histories, have become too risky to be entrusted to third-party brokers.
The company will continue to make sub-prime loans directly to consumers.
Although Wells is not exiting the sub-prime market, the decision is likely to mean that fewer sub-prime loans will be made, analysts said.
That could hurt people with shaky credit who hope to buy their first home, as well as existing homeowners seeking to refinance their mortgages as their adjustable-rate loans reset to higher rates.
“That will ultimately lead to better credit conditions in the long run” because only those with solid incomes who are able to afford mortgages will be allowed to borrow, said Mark Zandi, chief economist at consulting firm Moody’s Economy.com.
“But in the short run, it will worsen credit conditions,” he said.
Third-party brokers made close to $6.4 billion in Wells Fargo loans last year to home buyers who, for the most part, didn’t qualify for prime-rate mortgages. That’s about 1.6% of its $398 billion in residential mortgages in 2006.
“For the foreseeable future, we believe continued turmoil in the nonprime sector will result in financial returns ... not commensurate with the risks,” Cara Heiden, president of Wells Fargo Home Mortgage Division, said in a statement.
A Wells Fargo spokeswoman said she could not say whether the drop-off in lending through third-party brokers would be made up with increased business by its in-house operations.
“Wells Fargo does not speculate about the future,” said the spokeswoman, Debora Blume.
Shares of Wells Fargo fell 92 cents, or 2.7%, to $33.65.
Also Thursday, Moody’s Economy.com said mortgage delinquencies would hit a peak by the middle of 2008, reaching 3.6% of total outstanding debt, up from 2.9% in the first quarter of this year.
During the housing boom, lenders including Wells Fargo, Countrywide Financial Corp. of Calabasas and Washington Mutual Inc. greatly expanded lending to people with scant credit records or blemished financial histories.
Such borrowers typically pay more in interest because they have a higher risk of default. Mortgage brokers had incentives to close as many loans as possible to collect on their fees and commissions.
“The lines got blurred between what should be sound reasoning by financial institutions and a pawn-shop mentality,” said Anthony B. Sanders, a professor of finance and real estate at Arizona State University.
As long as the returns were high, few in the industry cared about the risks, he said.
Rising home prices delayed the consequences, experts said, because they allowed people to continue borrowing against rising equity on their homes.
But the risk is catching up. Default rates are rising and major credit rating agencies have begun downgrading bonds backed by sub-prime mortgages. Lenders are paring down or eliminating sub-prime loans altogether.
This week Wells Fargo followed Countrywide and Washington Mutual in ending a popular type of sub-prime loan, an adjustable-rate mortgage with low fixed interest in the first two years with periodic adjustments thereafter. As interest rates rise, many borrowers have been unable to meet their new monthly payments.
Oscar Garcia, manager of Service Brokers Mortgage of Pasadena, said he welcomed lenders’ attempts to weed out deadbeat borrowers but said “it is hurting the good guys too.”
The decline in sub-prime lending means fewer resources for homeowners who may have fallen on bad economic times.
“I have clients whose home values have gone down, and now they could end up losing their properties” because they can’t refinance, Garcia said. “Wall Street made a ton of dough when the market was high, and now they are just pulling the plug on everybody.”
Wells Fargo said it would close its sub-prime wholesale offices in Baton Rouge, La., and lay off 170 workers. It will also close offices in Des Moines and attempt to relocate its 67 employees to other operations.
