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03 Nov

Damn’d if you Do and Damn’d if you Don’t

A state court judge has ruled that Illinois can move forward with a lawsuit alleging that Wells Fargo & Co. steered minority borrowers into risky mortgages at the height of the housing bubble. Important to note the court DID NOT find that Wells Fargo engaged in discriminatory lending but the Illinois action is the first fair-lending lawsuit brought by a state attorney general against a national bank to reach discovery, attorneys familiar with the case said. After discovery, Illinois may be able to bring the case to trial. We believe this is a poor decision.
Here are the underlying issues and possible ramifications for this. ALL residential mortgage lenders (BofA, Wells Fargo, Chase, Ally Bank even Efinity for that matter) had and have annual requirements and goals for community lending. Ten years ago, the push from Fannie Mae and Freddie Mac were to grow minority ownership. This was a directive from prior US President Bill Clinton during his presidency (1993-2001). A challenging task as these markets historically have been plagued with on-going credit and down payment issues. The "steering" as referred by the Illinois state attorney general will be difficult to defend as home loan underwriting requirements were much less focused on standard automated underwriting findings and subject to interpretation. Many of the loan programs available to mortgage lenders at the time were very lenient on income and employment documentation compared to the standard FHA loan programs. In addition, programs typically offered short term fixed payment durations lowering the starting rate and payment which many borrowers were attracted to. Add the year over year property increase assumptions, these underwriting decisions are now deemed discriminatory. Furthermore, what will be difficult to defend is the reasoning why those loan programs were selected. In many circumstances, borrowers fully intended to flip or move in a short time window making short term fixed duration loans preferable as the interested rates were significantly lower. Adding to the lack of clarity behind these transactions in question, no where within the application explains or supports the reasoning behind the transaction.

WF was "gently" pushed to lend in certain markets which conventional lending could and would not support. The transactional volume requirements demanded certain products which were available to the market place. Unfortunately while clients are usually always made aware of the risks associated with an adjustable mortgage product the purchase decision is usually made payment. Are there individual transactions where perhaps the risk/rewards were not fully vetted out 100%, perhaps but in this instance we believe individual borrowers are not taking personal responsibility for their decisions.

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