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WELLS FARGO & co., the largest U.S. home lender, has assigned about 400 underwriters to originate mortgages for the bank to hold, with as many as 40 percent of those loans likely to fall outside government guidelines that took effect this month.


The CFPB (formed as part of the 2010 Dodd-Frank Act) was directed by Congress to create qualified mortgage rules after many banks were blamed for creating the credit crisis by originating mortgages to people who could not afford them. These new regulations provide legal protection to banks that meet guidelines and expose them to liabilities if the loans charge high fees or require total debt payments exceeding 43 percent of the borrower’s income.


Lenders are now only approving borrowers after fully documenting their income and assets. Since government backed loans account for 90 percent of the market, non-qualified mortgages can’t be insured by the Federal Housing Administration or sold to Fannie Mae or Freddie Mac, which are the government enterprises that package home loans into bonds.


Wells Fargo, which is responsible for one in five mortgages in 2013, will train this new group of underwriters to increase lending without losing control. They are pushing this initiative to compete for clients seeking non-conventional loans such as with interest-only payments. This will be in demand with rising interest rates and banks facing the largest regulatory overhaul since the great depression.


This approach represents a significant change for the bank. Historically they made loans to sell but now many of these loans will be held in their portfolio for the life of the loan. It is estimated that non-qualified mortgages could be between 25 to 40 percent of the bank’s total nonconforming loans which can’ be sold to Fannie Mae or Freddie Mac. 


This underwriting group will be part of a separate team that only underwrites loans without the intention of selling them. They will be located in six locations around the country. This may lead to faster closing times with fewer mistakes.