Wells Fargo Goes Old-Fashioned in Mortgage Underwriting

By Kate Berry

MAY 1, 2012 12:51pm ET

LOS ANGELES – Wells Fargo (WFC) plans to give its underwriters more control in approving mortgages that it retains in its own portfolio, as the bank tries to add high-quality assets to its balance sheet.

Wells is touting the new strategy, which it calls “judgment underwriting,” as part of an effort to attract borrowers that may not qualify for conventional mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration. Mortgages that the San Francisco bank underwrites using these new guidelines will not be sold to the government-sponsored enterprises; instead, Wells will keep them in its “held for investment” portfolios.

Brad Blackwell, a Wells Fargo executive vice president in the bank’s home mortgage unit, said that regulations have caused most banks to shift towards rules-based underwriting, which can be less flexible than more old-fashioned, in-house underwriting processes that allows for variations in individual borrowers’ qualifications.

Wells Fargo’s new “judgment-based” underwriting is “anathema to what is happening in the mortgage industry today,” Blackwell said during a panel discussion at a homeownership conference in April. “The more regulated the mortgage industry gets, the less judgment is allowed to be used.”

But he acknowledged that going back to old-fashioned underwriting has its own challenges.

“This is hard to do,” Blackwell told American Banker after the discussion. “How do we create consistency in using judgment for our own portfolio?”

Bank spokesman Tom Goyda said Wells is in the early stages of implementing the new strategy, and acknowledged that it will require extensive analysis and underwriter training.

Banks already have the ability to classify loans into different risk buckets. But Blackwell said there are “compensating factors,” which he did not identify, that underwriters will be trained and encouraged to look for.

Most lenders currently rely on “some judgment . but it’s more rules-based today and we’re going to be bringing in more judgment,” Blackwell told American Banker. “The way we will be approaching this is much more of a thorough judgment-based approach that deemphasizes all the individual rules and increases the old-fashioned ‘I get to know you’” type of rules.

Joe Garrett, a principal at the mortgage banking advisory firm Garrett, McAuley & Co. says banks are having a hard time finding good assets to invest in. Those that are retaining mortgages typically do so on jumbo loans with low loan-to-value ratios, which ensure that the borrowers have enough equity to withstand home price declines.

“Judgment underwriting is what used to be called common sense underwriting,” Garrett says.

And some potentially qualified home buyers may be shut out of getting conventional mortgages backed by Fannie Mae or Freddie Mac. For example, banks are eager to lend to investor-owners who buy multiple properties at one time, often putting down large upfront payments -: but those borrowers are only able to get GSE financing for a maximum of ten properties.

“What if you want to put 60% down and your name is Bill Gates and you already have 10 loans?” asked Garrett. “There is room for common sense underwriting if it’s done correctly. It can be very effective and it can be safe and sound lending.”

Blackwell said that while credit scores are still considered to be the most “reasonable predictor of success,” the traditional Fico score “cannot be the sole judge of whether a loan can be approved or not.”

Wells held an average balance of $229.7 billion in residential first mortgages at the end of the first quarter, and $84.7 billion in junior liens in the same period.

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Nonbank Reform Most Pressing Issue, Cordray Says

By Jeff Horwitz

MAY 4, 2012 1:32pm ET

While bankers remain concerned about the activities of the Consumer Financial Protection Bureau, they should take some comfort from a suggestion this week by the agency’s director, Richard Cordray, that the regulation of nonbank institutions is a top priority.

“[I]t is notable that we are the first federal agency authorized to supervise non-bank players such as mortgage originators, mortgage servicers, payday lenders, and private student lenders,” Cordray told the audience Thursday at an event hosted by the University of Rochester’s business school. “With so many areas going unsupervised, at least at the federal level, it is no wonder that consumer financial markets are rife with concerns about how well they serve the public.”

The CFPB’s plans to regulate non-bank financial service providers are not new, and it has vigorously asserted its capability of acting on numerous fronts at once. But Cordray described state regulation as patchy or absent in key areas, and suggested that the size of non-bank financial services justified immediate attention.

“There are 30 million consumers that owe debt are being chased by debt collectors,” he said in an interview following the talk. “It’s one of the areas that’s very much on our priority list.”

Bank collection practices wouldn’t be exempt from review – “from the consumer’s point of view it doesn’t make a difference if it’s the original creditor or a third party debt collector,” he said.

Regardless of who’s seeking payment, “To the extent that they’re trying to collect on debt they can’t vouch is accurate, that’s a concern,” he said. “To the extent that they’re deceiving the courts, that’s a concern.”

In the interview, Cordray said that CFPB enforcement efforts are progressing well, though he declined to estimate whether the bureau would have anything to announce before the end of its first year in existence, which occurs on July 21. The CFPB’s lack of formal enforcement authority before his January arrival “hampered” its early progress, he said.

“There’s a lot of work going on, and it will ripen in somewhat unpredictable stages,” he said.

Cordray also downplayed the bureau’s frustration about an ongoing spat over whether the targets of CFPB’s investigations can give the agency documents while maintaining their confidentiality. Some industry attorneys have warned that giving the CFPB such information could waive attorney-client privilege. But Cordray said that the targets of CFPB’s enforcement actions have not refused to turn over information based on such concerns in any significant number.

“People have hypothetical anxieties and fears,” he said. “We think that under settled law, if a bank makes an involuntary disclosure of information, it doesn’t waive privilege.”

Even still, the CFPB has issued a proposal to “say again what has already been said,” and supported legislation that would confirm that position. Those two actions should remove any lingering doubts about confidentiality, he said.

During Cordray’s public talk, he emphasized the rigor of bureau methodology and promised that the agency would not make rules hastily.

“The rigorous, sophisticated, analytical techniques that you bring to your businesses are the same techniques we are using to understand trends and developments in the consumer markets,” he said.

But Cordray said the bureau was dissatisfied by the limited availability of public data regarding consumer financial matters. In the CFPB’s review of banks’ overdraft practices, “we are coordinating a study on overdraft with more comprehensive data that a number of the largest banks are providing to us,” he said. More such initiatives will likely be announced as time goes by, he said, though it would be a long term effort conducted over “five or ten years” he said.

Home buyers should request energy audits before signing on the dotted line

May 04, 2012 02:15PM

By Kenneth R. Harney

It may be the best-kept secret in home real estate: For a couple of hundred dollars, a potential buyer thinking about writing a contract on an existing house can ask for a formal energy audit along with the standard inspection clause. That audit, in turn, can save the buyer thousands of dollars in future operating costs, and pinpoint the specific features of the house that need correction to improve efficiency. It might also be a tipoff to a sobering reality: This house is an energy guzzler. Either the asking price comes down, the seller fixes the problems, or I walk.

Though energy audits have been available to consumers for years — the best known is the so-called “HERS” or Home Energy Rating System — virtually nobody in the real estate field promotes them to buyers. Of the 120,000 HERS audits completed last year in the country, according to experts, just 12,000 were done on existing houses — a trivial number in a market with 4.5 million resales. The rest were performed on newly built homes.

Since energy costs rank high on the list of ongoing expenses for many homeowners, and multiple studies have demonstrated that energy-efficiency renovations more than pay for themselves in utilities savings, why aren’t more audits performed? In an era of $4-a-gallon gas and autos that are marketed on the basis of their low fuel consumption, shouldn’t buyers know about the operating costs of the houses they are bidding on? Shouldn’t energy audit contingency clauses in purchase contracts be as commonplace as home inspection clauses?

Real estate agents who primarily list houses and represent sellers say buyers almost never ask for them. Nor do sellers, who prefer to avoid giving purchasers ammunition to make lower offers during negotiations or costly demands for repairs before closing.

Even real estate agents who carry the “EcoBroker” green designation — described on the EcoBroker website as “the premier green designation for real estate professionals” — don’t necessarily push the subject. Frances Vernon, an EcoBroker with Dilbeck Real Estate Real Living in La Cañada, Calif., said in an interview that she’s “never been asked by a buyer or seller” to order a HERS energy audit on a house. “It’s just not done here. It’s not a pressing issue.”

June Gardner, an EcoBroker with the Evers & Co. real estate firm in Washington, D.C, said “it’s not on people’s minds really. They’re much more worried about mold or radon and lead paint” — the sort of defects that standard home inspections turn up.

Of four EcoBroker designees randomly selected for interviews around the country, only one said he regularly recommends energy audits to both sellers and purchasers, and finds that they help sell houses — even raise prices — rather than wrecking deals.

Leland DiMeco, owner and principal broker of Boston Green Realty, said that although not all clients opt for one, “I do bring it to the table” with everyone. “It just makes sense. Most buyers want to feel comfortable that they’ve done their due diligence and know what they’re getting.” Even sellers are warming to the idea.

DiMeco recently made the energy audit pitch to a seller of an 87-year-old New England colonial that had significant energy leakage and efficiency problems. The seller agreed to do a HERS audit, then spent money putting spray cellulose insulation in the attic, replacing the leakiest windows, upgrading interior lighting and replacing some low-efficiency appliances.

The result: Shoppers loved seeing the energy audit, the upgrades and the seller’s full disclosures. The house sold six days after listing for $50,000 more than any nearby, energy-wasting comparables. Doing the HERS audit “turned out to be a great marketing benefit for the sellers,” DiMeco said, even though they needed some convincing up front.

Steve Baden, executive director of RESNET, the organization that trains and certifies inspectors conducting HERS audits, said that although the “adoption rate” on existing homes “has been low,” builders of new homes have been enthusiastic. Forty percent of all new homes constructed in the country now get HERS audits and scores, he said.

About 4,000 auditors are now certified to conduct HERS studies — they can be found along with information on contractors to do energy efficiency improvements online. Equally important to homebuyers, said Baden: RESNET has negotiated agreements with two of the largest home inspection networks to begin offering lower-cost energy efficiency surveys and performance audits as add-ons to standard inspections. Once this becomes commonplace, there may be little need for separate contract contingencies for energy. Energy efficiency will just be part of the package.