If you are a too big to fail bank like Wells Fargo, the wages of crime look awfully good. RIp off as many as 10,000 people to the point where they lose their homes and your good friend the Fed will let you off the hook for somewhere between $1000 and $20,000 per house. And as we’ll discuss in due course, this deal isn’t just bad for the abused homeowners, it’s also bad for investors and sets a terrible precedent, which means its impact extends well beyond the perhaps 10,000 immediate casualties.
Oh, and how much does the Fed think you should be paid if you were foreclosed upon thanks to Wells? Per the settlement document:
if, primarily as a result of the additional payment obligation on the loan resulting from the altered or falsified documents, on or before the date of this Order, the borrower’s home was foreclosed on or the borrower sold the home in a short sale, Administrator A shall provide an additional amount up to $7,000 in appropriate remedial compensation to reimburse the borrower for any expenses attributable to the foreclosure or short sale;
In other words, as Adam Levitin noted, all the loss of your home is worth according to the Fed is your moving costs and maybe a month or two of rent.
Wells settled claims that its subprime operation had not only steered prime borrowers to higher cost subprime loans, but also had also doctored documents so subprime borrowers would get loans that they weren’t qualified for (and remember, in the wild world of subprime, that’s a pretty tall order). The settlement consisted of an $85 million fine plus the additional compensation to abused borrowers who were put into unduly costly loans. Levitin also described the claim process as “elaborate.” Given that it has yet to be designed, I wonder if Wells will make it sufficiently onerous so as to discourage wronged borrowers from seeking restitution.
Below is the consent order:
Now to the investor angle. From reader MBS Guy via e-mail:
Between 2004 and 2008, Wells Fargo subsidiary, Wells Fargo Financial, solicited borrowers for non-prime loans. The Wells Fargo sales staff was compensated for loan volumes and had minimum targets. Part of their tactics was to tell customers that the debt consolidation loans would improve their credit, though this was not the official policy.
In order to meet sales targets, certain Wells Fargo sales staff falsified or changed borrower’s incomes to help qualify borrowers for loans. Sales staff also sold borrowers subprime loans when they could have qualified for prime loan rates, frequently pushing the borrower’s to take out more cash during the refinance so that the loan would not meet the prime loan guidelines.
Wells Fargo lacked the internal controls to detect or prevent both the loan data falsification and the “up selling” of prime borrowers into non-prime loans.
While it is nice that the Federal Reserve is forcing Wells Fargo to compensate victims of the bad loan origination practices, the penalties seem to fall flat. What about the investors in the loans made by Wells Fargo? Prior to the crisis and many times since, Wells Fargo has trumpeted its pristine reputation and pointed out that it is different from the bad actors in the mortgage market. Many investors relied on these pronouncements of integrity by Wells when investing in mortgage backed securities with Wells Fargo loans. And Wells, which was much more heavily regulated than other banks (although this subsidiary was likely not) no doubt benefitted from the halo effect of being presumed to be under heavier regulatory scrutiny than non-bank subprime originators.
Most market participants had reason to suspect that subprime lenders like Novastar, New Century and Ameriquest were using aggressive and questionable lending tactics and those loans received additional diligence, as a result (of course, it turned out the diligence didn’t help much). It turns out, Wells Fargo used similar tactics, while holding itself out as a superior lender. Assuming the number of loans affected was 10,000 and the average loan balance was about $180,000, the balance of these loans would have been about $1.8 billion. How many mortgage securities contained these loans? How many CDOs did those MBS end up in? How did these bad loans alter the way rating agencies and investors weighted the risk of the deals they reviewed?
It seems reasonable to argue that Wells Fargo’s offenses were worse than the small, reputation-challenged subprime lenders precisely because Wells Fargo claimed to be superior. If Wells engaged in such ugly tactics, it illustrates just how universal the abandonment of underwriting standards and procedures was.
Certainly, the Federal Reserve must be aware that more than just the borrowers were adversely affected by the bad loans and the abandonment of lending principles. As described in the consent order, Wells Fargo’s policy was to compel sales officers to make these loans at a fast pace. The bad practices existed within the company without detection for four years, all the while Wells was holding itself out as better than it competitors. In addition, while lenders like New Century were outside the scope of the Federal Reserve’s regulatory authority, Wells Fargo was not. At the same time that Wells was committing these lending abuses, the Federal Reserve was declaring that subprime lending was not a problem at its regulated institutions. So this slap on the wrist punishment looks like a cover up of the Fed’s failure to supervise.
We’ve commented repeatedly on this blog as to how Wells continues to maintain that it is a cleaner institution than other mortgage originators and servicers, when the evidence shows there is no basis for its claims. Indeed, Wells is the Lehman of the big four banks, proportionately more heavily exposed to residential real estate than the rest, and particularly aggressive in its accounting (it has been engaging in highly visible underreserving for loan losses since early 2009). As we’ve said before, if Bank of America starts to look like it is in serious trouble, Wells is next in line. And it couldn’t happen to a more deserving bunch.