THE BLOG

Send In the Clowns

06/03/2014 01:54 pm ET | Updated Aug 03, 2014

Since time memorial, man has been motivated by an easy buck and short skirts. The recent frenzy of mortgage lenders to repeat the mistakes of history may be upon us again, as some lenders are experiencing 'greed creep' all over again.

Coming off at least $3 billion dollars worth of lawsuit payouts over the past 36 months, which doesn't include the $25 billion dollar settlement inked in 2013 with 49 of the 50 Attorney Generals, Wells Fargo Bank must apparently think lawsuits are good for your health, since they digest them like multi-vitamins. Just this past February, and as a comical aside, Wells Fargo stated it has decreased expected litigation expenses by $50 million for 2014. As preventive medicine, the bank also stated it will undertake a two year ethics review to avoid future litigation! Smart move.

Although one ought not be too judgmental on Wells Fargo in its quest to ease its own mortgage lending standards --- since to their credit they were first out of the blocks to voluntarily ease certain lending criteria. Apparently the other major lenders, such as JP Morgan, Bank of America, and CitiGroup (the usual suspects), didn't get that email, since after the 2008 real estate implosion they blocked email from Wells Fargo (permanently), and marked it as spam.

From a journalistic perspective, Well Fargo's credit easing proclivities are a high lobe over the net just itching to be slammed back. In short, it is the proverbial dream come true when you can Monday morning quarterback a slow approaching train wreck on a Sunday nite.

Mortgage Intestinal Fortitude
In the final analysis, Wells Fargo is the one and only major lender who just made getting a loan a little bit easier for the millions of regular Joe's out there. And kudos to them. Not only are they a trend setter, which doesn't come to mind when thinking of stuffy Brooks Brothers wearing bankers, but they are in a league of their own. Just don't let them know that they're the only ones running into a burning building alone!

Which means one of two things. Either they'll be burnt to a crisp (much like they were last time), or they'll come out looking like a hero.....and as a lender that had the balls enough to lend to an appreciative consumer base that was thankful for the business.

To be clear, the standards being promulgated by Wells Fargo are not earth-shattering. They are not giving out zero down home loans to someone who fills out a stated loan application with a 500 FICO credit score.

Here's the skinny on Wells Fargo's business decision, which is part altruistic, and part business savvy (disguised as a flagrant market share grab). According to Franklin Codel, who heads loan production for the San Francisco-based company, they feel more comfortable with "wider credit availability", since they have clearer communication with Fannie Mae and Freddie Mac on new underwriting rules that are now in place.

To quote Mr. Codel, "We have more confidence that should the loans go into default, we've done our job properly and we aren't going to get a repurchase,"

New Underwriting Guidelines
Some of the more liberal underwriting guidelines are for example, accepting borrowers with credit scores of 600, down from 640 for FHA loans. In addition, the bank has made it easier to source down payment requirements. Meaning if you do not have down payment money readily available, you can accept a money gift to establish the down payment.

What are some of the other goodies in Wells Fargo's mortgage grab bag? The bank will lower its loan-to-value (LTV) requirements on conventional home loans. Which means instead of putting 10% to 15% down on a home purchase, that requirement is slowing easing to 5%. This does not apply to FHA home loans, which are already at 3.5% down.

And if all else fails when qualifying for a loan, the bank will look for "compensating factors" to close a loan, according to Mr. Codel. More particularly, what this means, is that the loan underwriter may request an explanation of a credit history event, in addition to reviewing the strength of one's income and job stability.

Post 2008 real estate crash, a little known underwriting provision that major lenders will utilize to approve a loan is known as "extenuating circumstances." In that situational scenario, a bank might accept a lower credit score caused by delinquencies after a job loss, if for example the borrower has money reserves beyond the required amount.

Quantitative Easing for Main Street
As a positive harbinger of good things to percolate from the mortgage industry, and not just from Wells Fargo, in March of this year credit standards were the "loosest" they were in two years.

Without getting too technical, the Mortgage Bankers Association index reported, that based upon underwriting guidelines, the degree of difficulty in getting a loan rose to 114 from 100, since when it first started this specific measurement index in March 2012. And according to investment bank Morgan Stanley, nearly 16 percent of the mortgages for home purchases in March 2014 went to borrowers with debt-to-income (DTI) ratios over 43 percent of their pay, which is up from 13.4 percent in June 2012. Although the latter percentages are minute in the big picture, it shows a home spun approach to "quantitative easing" as it applies to everyday households/borrowers who desire a home purchase or refinance.

However, this quantitative easing mantra has more to do with a supply and demand issue than anything else. With refinancing drying up for the lending industry over the past year, as a result of interest rates rising in addition to a partially exhausted market, lenders are viewing the home purchase market as a way to supplement their core business, which is the business of inexhaustible lending.