“I have clients whose home values have gone down, and now they could end up losing their properties” because they can’t refinance, he said. “Wall Street made a ton of dough when the market was high, and now they are
BY DANIEL YI
LOS ANGELES TIMES
Financially strapped homeowners got another dose of bad news Thursday: The United States’ second-largest mortgage lender said it would stop issuing subprime loans through independent brokers.
San Francisco-based Wells Fargo & Co. said such loans, made to borrowers with spotty credit histories, have become too risky to be entrusted to third-party brokers. The company will continue to make subprime loans directly to consumers.
Although it is not exiting the subprime market, the decision likely will mean fewer subprime loans will be made, analysts said.
That could affect people with shaky credit looking to buy their first home, as well as existing homeowners who are looking to refinance their mortgages as their adjustable-rate loans reset to higher rates.
“That will ultimately lead to better credit conditions in the long run” because only those with solid incomes and able to afford mortgages will be allowed to borrow, said Mark Zandi, chief economist at Moody’s Economy.com.
“But in the short run, it will worsen credit conditions,” he said.
Third-party brokers made close to $6.4 billion in Wells Fargo loans last year to home buyers who, for the most part, didn’t qualify for prime-rate mortgages. That’s about 1.6 percent of the company’s $398 billion in residential mortgages in 2006.
“For the foreseeable future, we believe continued turmoil in the nonprime sector will result in financial returns … not commensurate with the risks,” Cara Heiden, president of Wells Fargo Home Mortgage Division, said in a statement.
A Wells Fargo spokeswoman could not say whether the drop in lending through third-party brokers would be made up with increased business by in-house operations.
Also Thursday, Moody’s Economy.com said mortgage delinquencies would hit a peak by middle of 2008, reaching 3.6 percent of total outstanding debt, up from 2.9 percent in the first quarter of this year.
During the housing boom, lenders including Wells Fargo, Countrywide Financial Corp. and Washington Mutual Inc. greatly expanded lending to people with scant credit records or blemished financial histories.
Such borrowers typically pay more in interest because they have a higher risk of default. Mortgage brokers had incentives to close as many loans as possible to collect on their fees and commissions.
“The lines got blurred between what should be sound reasoning by financial institutions and a pawn-shop mentality,” said Anthony B. Sanders, a professor of finance and real estate at Arizona State University.
As long as the returns were high, few in the industry seemed to care about the risks, he said.
Rising home prices delayed the consequences, experts said, because they allowed people to continue borrowing against rising equity on their homes.
But the risk is now catching up. Default rates are rising, and major credit-rating agencies have begun downgrading bonds backed by subprime mortgages. Lenders are paring down or eliminating subprime loans altogether. Earlier this week, Wells Fargo followed Countrywide and Washington Mutual in ending a popular type of subprime loan, adjustable-rate mortgages with low fixed interest in the first two years but adjusted every two years after that. As interest rates rise, many borrowers have been unable to meet their new monthly payments.
Oscar Garcia, manager of Service Brokers Mortgage, a mortgage broker in Pasadena, Calif., said he welcomes lenders’ attempts to weed out delinquent borrowers but said “it is hurting the good guys too.” The decline in subprime lending means fewer resources for homeowners who might have fallen on bad economic times.
“I have clients whose home values have gone down, and now they could end up losing their properties” because they can’t refinance, he said. “Wall Street made a ton of dough when the market was high, and now they are just pulling the plug on everybody.”
