Should You Get Only $7000 if Wells Stole Your House?

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:

Wells Fargo Federal Reserve Mortgage Settlement 7-21-11

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.

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  1. Middle Seaman

    The political and financial situation reminds me of the Soviet Union. It may take decades before the oligarchs and their helpers will be toppled. The president screws us with limited opposition, while some of us even justify him.

    In the coming years, there is no hope and no change. Obama and the Well Fargos mock us with impunity.

  2. Maurice Ivans

    Gorby at least housed people up until the end. These mother fuckers are more concerned about the next war they’ll start.

  3. Linus Huber

    Politics is always reactive and never proactive even if a problem stares you straight into the face. The hope always is that it will blow up when one is gone and another person will occupy the position in charge. And if it does not work out, well, we just have a crisis and it, of course, is never the politician’s fault as they will find early on a scape goat to blame.

    It is really sad that we do not find idealists as leaders anymore but simply people who serve the financial interests of the bankers. The only real hope is the fact that history shows that at the end real justice will bring down those who take advantage and pretend and extend at absurdum. I for one will not be sorry for those presently in charge when they end up in jail and suddenly were just part of a system they were unable to fight.

    1. hermanas

      My eighth grade report card’s only critique was that I was “idealistic”.
      I believe the quickist way to dissolve society is to undermine the law as we see happening now.
      Good-bye and good luck.

  4. Susan the other

    I read the chart yesterday showing who regulates the banks. Following the distinct arrow from the “Federal Reserve” icon to the “Big Bank” icon I learned that the Fed is the regulator of the banks and is in charge of regulating mortgages and housing. (This surprised me because there has been such an avoidance of discussion about this specific responsibility and the failure to satisfy it.) The SEC, on the other hand, is responsible for “securitization” of mortgages. There was no regulator in charge of the integrity of the land title recording system which did not have its own icon – as if the mortgage industry had nothing to do with the land title system. And, of course, there was no link between the SEC and the Fed. Gee, why would that be necessary? Who wants to call attention to the fact that the land title system has been commoditized? Then I read today on foreclosurefraud that even satisfactions of mortgages are robosigned! When Matt Stoller mentioned yesterday that the administration is still worried about housing, it was such an understatement. I mean, triple damages times 5 million plaintiffs over the course of a decade?

    1. Cedric Regula

      I remember early in the crisis, one time Ben even stated that the Fed is not a regulator at all when he was questioned on the housing/banking crisis. That was when I started doing googles on what our regulatory patchwork is between the Fed, OCC, SEC, FDIC and state regulators. Found a similar chart to what you describe.

  5. Victor Berry

    It’s tough to prosecute bank executives for criminal activity when all they do is convey to their subordinates the message “if you can’t get the job done, I’ll find someone else who can!” As the message trickles down the management hierarchy generating more unethical/illegal behavior at each level, the plausible deniability trickles up. The only option for the prosecutors is to prove willful blindness as was supposedly done with Enron.

    1. David

      your comment is exactly what the murdochs testified / promoted to parliament – they issue the orders to commit a crime in general but the orders go down the line and the lower level managers take the specific actions to comply with the order and when the shit hits the fan the murdochs deny culpability

  6. Alfreda Weiss

    My neighborhood is in the heart of sub-prime mortgages and underwater by 60%. The banks will not refinance, but will foreclose. Quickly friends of the foreclosing company move in at 75-80% off value. No one seems to notice or care except the neighbors who are making preparations to walk away.
    This is revolutionary change and none of it is good. Feels like the drug lord took over the neighborhood and now controls it.

  7. ECON

    When the internal contradictions of US society in all its dimensions become conscious on a daily basis to the citizens it has the effect in this interconnected world of lightening speed towards a resolution similar to the fall of the Soviet Union or to a quasi military command of the federal government or to a corporate fascist state. Once again so-called patriots who profited greatly from the prior regime are naked to the truth and are seen more as terrorists in pursuit of greed and avarice.
    In the end we really do not know how it plays out.

  8. Warner Mark Bankster

    Call me cynical, but the idea in the following passage is [the Bank] simply played loose and didn’t set up a system to catch bad intentions. This is laughable, because on some level management knew exactly what they were doing because it made them mo’money no matter what happened. So the MO changes from week to week, first blame the borrowers, then the wayward brokers, maybe the Bankster owned Fannie Mae and the Gub’mint, then come full circle and claim management innocence:

    “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.”

  9. Paul H

    I am a real estate agent in Sydney Australia(specializing mainly in rentals).
    To evict a tenant for non payment of rent I have to go before a tribunal to prove my case.
    If I evict a tenant with fraudulent documentation and this is discovered the following will happen.
    I will be fined a substantial amount – $20,000 plus.
    I will lose my license.
    For perjury before the tribunal I will be looking at serious jail time.
    And the evicted tenant will have substantial claim against me (probably my insurance company).
    If I was to say that the tenant was 3 months behind in rent the courts would rightly say “So What”
    Why aren’t you Americans marching down main street with your pitchforks held high?

    1. Mike Kempson

      My, what a difficult time you are having with your deadbeats.
      We Yanks could set our watch to reliable Lords like the late Leona Helmsley. She controlled her properties with spirited righteousness, gracefully evicting, renting and effectively controlling an immensely profitable real estate empire. Through hard work and perserverance she earned the right to control every aspect of thousands of housing units, But then the Government felt it necessary to intervene, just like in the Soviet Union. Who says women can’t be successful? Socialists, that’s who, and people who think they can live for free on our dime.

    2. Alfreda Weiss

      I was a Real Estate Broker for 35 years. Most of that time it was ethical and followed CA state laws. I live in a right-wing area. I felt ethics begin to slide from 2000 until 2006 when I received obviously fraudulent offers that would be funded. Believing I could be prosecuted under state laws while those funding the loans were national fat cats, I got out of the business. Hold on to your ethics in Australia. There will someday be a backlash for what has happened in the US. There is already a belief that honesty and fairness do not exist.

  10. Naked Capital One Bank

    …. A front group is an organization that purports to represent one agenda while in reality it serves some other party or interest whose sponsorship is hidden or rarely mentioned.

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