by Short Sale Agent Jerry Gusman on 05/02/12
Wells Fargo doubles down on housing
At the start of the financial crisis in 2007, the top four retail
banks — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo —
were printing money by turning residential mortgages into securities of
various toxic flavors and selling them to investors. In many cases,
these securities were deliberately fraudulent, part of a breakdown in
the legal protections against such activities put in place during the
Great Depression.
Wind the clock forward to 2012 and three of these four behemoths have
largely withdrawn from the secondary market for home loans, especially
loans purchased from other banks. Weighed down by litigation and other
concerns, Bank America, Citi and JPMorgan have been withdrawing from
most aspects of the market for real estate finance other than writing
new business for their own portfolios and then only profitable business.
But the last of the four banks, Wells Fargo, has thrown caution to
the wind and is aggressively writing new business in both residential
and commercial real estate loans. The $1.3 trillion asset lender is now
the dominant player in the secondary market for mortgage loans and has
actually managed to grow its market share and assets when other large
banks are shrinking their books.
In New York City, for example, the backyard of JPMorgan and
Citigroup, Wells has become the leading lender to commercial property
developers. One of the oldest and most respected players in the New York
commercial real estate community tells HousingWire that Wells is
writing business that is at least half a point lower in cost than loans
available from other banks and with far easier terms.
In residential, Wells Fargo enjoys a market share above 25% and
continues to grow and grow. This hyper-aggressive stance is not hard to
explain. Unlike the other zombie banks, Wells does not have a
significant securities or capital markets business to fall back on, not
that these markets are doing particularly well at present. The only
significant business line that Wells can use to support its earnings and
balance sheet is real estate lending. Thus the quality of the bank’s
future earnings are largely a function of whether the U.S. real estate
market starts to recover in earnest.
The other issue for Wells is that it needs to keep adding new
business and revenue to stay ahead of the cost of resolving bad loans
still on the books or in process between foreclosure and disposal. Like
all of the largest banks, Wells has been dragging its feet on resolving
bad assets because delay is the only option. By focusing its sales of
REO on those properties with the lowest “loss given default,” Wells is
able to make its bad loan position look better than it really is and
also keep the weight of loss from hurting earnings.
There is an old saying on Wall Street that when a company does not
say anything to investors and the analyst community, then it is all bad.
Since the start of the crisis, Wells has made an art form out of
failure to disclose, particularly when it comes to the credit loss,
doubtful and past-due experience on the bank’s retained loan portfolio
and related loss reserves. While Wells’ peers among the largest banks
have increased written and oral disclosure regarding loan losses and
related data during the past three years, Wells consistently has
stonewalled the investment and analyst communities. Most recently, Wells
has even defied a subpoena from the SEC, failing to produce documents
for a formal investigation regarding possible fraud in the creation of
residential mortgage backed securities that the bank sees as
“inappropriate.”
Today in many metropolitan areas around the U.S., Wells is the most
aggressive lender in the marketplace — and also the least willing to
share its credits with other banks. Whereas in the past Wells would
invite the likes of Comercia or FifthThird into a commercial
transaction, today the bank rarely syndicates credits and almost always
retains its own production internally rather than sell the credits to
investors.
Wells is now also the chief protagonist of the smaller banks. The San
Francisco-based giant has turned converting the residential mortgage
customers of smaller banks into an art form.
The aggressive posture of Wells stands in sharp contrast to the other
three TBTF banks — JPM, BAC and C — which have largely stepped back
from correspondent lending and have also seen their market share overall
in terms of new mortgage originations fall sharply relative to Wells.
One former Wells banker said to me at the HousingWire REthink
conference: “At Wells you do the business first, then figure out the
issues later. They are the most aggressive lender in the U.S. and have
been for some time.”
Several participants at the HW conference told me that Wells is
literally buying market share by writing loans which are not economic,
but then enhance current earnings by booking the estimated value of the
“customer relationship” up front in the quarter when the loan is closed.
If this type of accounting gimmickry makes you recall the days of the
dot.com bubble, then you are on the right page.
A representative of one of the largest buy-side mortgage conduits in
the U.S. told Institutional Risk Analytics that the accounting treatment
of “customer relationships” by Wells is allowing the bank to take
market share from all other lenders, large and small, but that the
medium-term impact on the bank’s balance sheet and earnings could be
decidedly negative when the bank eventually is forced to moderate its
aggressive sales tactics.
Alan Boyce of Absalon told the REthink conference that Basel III and
litigation risk are causing the largest banks to exit the mortgage
market. He contends that Wells is “the last man standing” in the
mortgage origination sector, but that even this giant lender will be
forced out of the mortgage market by regulatory changes such as Basel
III that make it impossible for banks to retain MSRs.
David Akre of Whole Loan Capital also noted at REthink that many
smaller banks are no longer willing to selling loans servicing released
to Wells, but that the rules put in place by the housing GSEs are making
it impossible for smaller banks to sell mortgage servicing rights. Akre
reckons that unless the GSEs change their rules regarding loan putbacks
and MSRs, the shrinkage mortgage origination by smaller players will
continue.
Overall, most of the participants at the REthink conference predicted
that home prices will likely trend lower through 2012, but then
stabilize and move sideways for years.
The combination of a shrinking pool of financing, large inventories
of unsold homes, negative regulatory changes such as Basel III, and a
dwindling pool of qualified borrowers adds up to a continued decline in
the rate of home ownership in the U.S.
But to the point about Wells Fargo, the bank’s aggressive lending to
both retail and commercial borrowers could come back to haunt the giant
lender in years to come. Many of those commercial property financings
that the largest U.S. mortgage lending is putting on its books in the
New York market are premised on the idea of rising lease rates in the
next few years, but nothing could be further from the case.
In fact, say most of the commercial real estate developers I know in
New York, lease rates are likely to keep trending lower over the next
few years as the oversupply of real estate starts to become a glut.
Some of the most prominent office buildings in the city are half
empty, including the showcase structure at 9 West 57th St. where your
humble commentator is writing this missive. The developers are pulling
the space off the market rather than accept the $50-60 per square foot
that is commonly paid for prime Manhattan office space today.
The private equity firms that are buying these Manhattan commercial
deals funded with loans from Wells Fargo are assuming that the Silicon
Valley world of media is somehow going to soak up all of the empty
commercial space in New York City, a fantastic delusion that seems to
also appeal to New York Mayor Michael Bloomberg.
But the sad fact is that most of the large financial institutions I
know are pushing back against rent increases in major New York
properties – and moving offices to reduce expenses. Thus one has to
wonder whether Wells Fargo won’t be feeling a bit of indigestion from
its headlong pursuit of market share in the U.S. real estate market.
Stay tuned.
Christopher Whalen is a regular columnist for HousingWire and senior managing director of Tangent Capital Partners.
by Short Sale Agent Jerry Gusman on 05/02/12
Lower than 720 FICO score? No mortgage for you!
A survey released Monday by the Fed told us something we’ve known for a while (well, since the housing bust): Those with bad credit can’t get a mortgage.
Now, lets break that down by score and down payment:
Forty-three of the 52 banks surveyed said they weren’t as likely to
give a mortgage to those with a FICO score of 620 and a down payment of
10% than they were in 2006. Even when the down payment was bumped up to
20%, 37 banks still gave it the thumbs down.
Even those with a better score still had it a bit rough. With a score
of 680 and a down payment of 10%, 36 banks said they were less likely
than in 2006 to make the loan. That group fared slightly better when the
down payment was 20%, with only 15 banks saying they were less likely
to make the loan — four more were even more likely to go through with
the deal.
When the FICO score hit 720, the difference between now and then was
decently minimal. With 10% down, 37 banks said they would be just as
likely to make the loan now as they were in 2006, with 12 banks saying
less likely and 3 saying more likely.
Those high scorers did even better when the down payment increased to
20%. Five banks said they were less likely, six said they were more
likely and a whopping 41 banks said they were just as likely.
All of this very interestingly sticks to the results that the National Association of Realtors
gathered last month. Though it would have been interesting to see the
Fed’s results for those with credit scores of 740 and above, since NAR
has them much more likely to get a mortgage than before.
Given that these new tightened standards are a follow up to U.S. home
prices nose-diving by about one third, the banks getting picker have
helped to affirm the finding from my blog on Friday that credit
standards are loosening in everywhere except mortgages. Auto loans, credit cards, you name it.
Odds are, you probably can’t have a mortgage unless you’re sitting on a 720 FICO score.