Wells Fargo to Offer Low-Down-Payment Mortgages Without FHA Backing
May 26 2016 - 1:30AM
Dow Jones News
Wells Fargo & Co. is rolling out a new mortgage for
borrowers making minimal down payments, an offering that could
allow the bank to step back significantly from a controversial
Federal Housing Administration program.
The move comes as most of the country's main banks exit from any
substantial role making loans guaranteed by the FHA. The agency
insures mortgages made to buyers who would otherwise have a hard
time getting loans, but it has been shunned by banks following a
wave of lawsuits by the Justice Department that alleged poor
underwriting.
Wells Fargo, which made $6.3 billion in FHA-backed loans last
year, is the only mainstream bank in the FHA's top 20 originators,
according to trade publication Inside Mortgage Finance.
The bank's new mortgage allows borrowerswith credit scoresas
low as 620 on a scale of 300 to 850to make down payments of as
little as 3%, while also allowing them to use income from family
members or renters to qualify. The requirements don't represent a
significant expansion of mortgage access, but will allow Wells
Fargo to make more loans to low- and middle-income borrowers
without going through theFHA.
The bank's new program, which was launched through a partnership
with mortgage-finance giant Fannie Mae, could replace about of half
the bank's current FHA volume and increase its market share, a
person familiar with the matter said.
In April, Wells Fargo and the government wrapped up a $1.2
billion settlement in which the lender admitted it submitted
ineligibleloans for FHA backing and failed to notify the
government when it became aware of the problems. With the
settlement, Wells Fargo joined J.P. Morgan Chase & Co., Bank of
America Corp., SunTrust Banks Inc. and many other lenders that have
been penalized or threatened with penalties for FHA-related
problems.
Some executives have said the penalties are too harsh for what
they describe as minor errors, while government lawyers have said
they have been appropriately high and that some lenders' actions
amounted to fraud.
Wells Fargo, like other banks, has scaled back on FHA-backed
mortgage lending in recent years. The bank's loans accounted for
just 2.5% of total FHA mortgage dollars originated in 2015, down
from 9% in 2013 and 13% in 2010, according to Inside Mortgage
Finance.
Banks including J.P. Morgan and Bank of America were in the top
20 lenders under the program as recently as 2014, before they
curtailed their participation. Nonbank lenders have rushed in to
fill the void.
Bank of America in February unveiled a new low-down-payment
mortgage of its own without FHA backing. The Self-Help Ventures
Fund, a Durham, N.C.-based nonprofit, agreed to absorb some losses
in the event a borrower defaults, to reduce the cost of that
product. Self-Help said the Bank of America product is on pace to
make between $300 million and $500 million in mortgages within the
first year.
Self-Help, which comprises a state and a federally chartered
credit union as well as the ventures loan fund and has a total of
$1.6 billion in assets, also teamed up with Wells Fargo to take on
the risk of a borrower defaulting on some mortgages in its
program.
The new Wells Fargo product might save money for some borrowers
who would have otherwise taken out an FHA-backed loan. For example,
a borrower who buys a $200,000 home and has a credit score of 715
would pay about $1,040 a month with an FHA loan from Wells Fargo,
assuming the borrower includes the FHA program's upfront costs in
the loan amount and makes a 3.5% down payment, the minimum the
agency requires. The same borrower under the new program would pay
about $994 a month with a 3% down payment.
By taking a housing-education course, the borrower could reduce
the mortgage rate by an additional one-eighth of a percentage
point, making the payment about $979 a month.
The FHA in recent months has attempted to clarify lenders'
responsibilities in making FHA-backed loans to keep them from
withdrawing from the program, but many lenders believe the
program's legal risk is still too high.
"There's clearly a disincentive to use the FHA for first-time
home buyers in the way it's been done in the past," said David
Stevens, CEO of the Mortgage Bankers Association, a lender trade
group.
An FHA spokesman in an email said, "We believe our efforts to
clarify policies and streamline processes are helpful for lenders
looking to do business with FHA and serve a critical part of the
home buying population."
Fannie Mae and competitor Freddie Mac have backed loans with
down payments of as little as 3% for more than a year, though the
programs' volume is still small. In the past five quarters, Fannie
has backed about 30,000 mortgages with down payments of less than
5%, which is about 1% of its business.
Fannie Mae Vice President of Product Development Jonathan
Lawless said programs similar to Wells Fargo's could be developed
by other lenders and that he expects the volume of low-down-payment
mortgages that Fannie backs to grow.
(END) Dow Jones Newswires
May 26, 2016 01:15 ET (05:15 GMT)
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