Why Wells Fargo is Re-Entering THIS RISKY LOAN MARKET

Oct 10, 2018

 

Just months after ponying up more than $2 billion for allegedly lying about the quality of subprime mortgages backing residential mortgage-backed securities (RMBS), Wells Fargo has announced it is working on a $441 million RMBS without a government guarantee. These pools of mortgage loans may be created by banks, like Wells Fargo, or other financial institutions. Investors may purchase shares in these pools as an investment and are considered to be one of the precipitating factors in the financial meltdown in 2007 and 2008 as investors were, allegedly, mislead about the quality of the home loans in these pools. When the housing market crashed, causing increases in foreclosures and declining home prices, the value of investments made in RMBS tanked as well.

Wells Fargo’s latest penalty, which the Department of Justice announced in early August, is the result of allegations from the DOJ that the bank “knew that loans that went into mortgage bonds in question were based on misstated income information and allowed the loans to be securitized and sold nonetheless.” The DOJ accused the bank of launching an initiative in 2005 to double subprime and Alt-A loans. The latter loans are mortgages with risk profiles falling between prime and subprime. They are generally made to borrowers with good credit histories but are considered risky due to “customizations” from the lender, such as requiring lower-quality documentation of income or employment. Lenders still make Alt-A loans today, and these loans may have higher LTVs, lower down payments, and allow 100 percent financing or no down payment at all. In exchange, lenders can charge higher interest rates for these loans.

Wells Fargo follows JP Morgan Chase as the only other big bank to reenter the RMBS market at this time. The bank explained the decision simply, saying the reentry into the market “was to best serve our mortgage customers as the market evolves and to expand our funding resources.” Given recent heavy investor demand for these non-qualified mortgage transactions, the new RMBS offiering that Wells Fargo predicted “would include recently originated, non-conforming, prime loans consistent with those we have been putting on our balance sheet for the past several years,” will likely meet with investor approval.

Do you think this is a good more for the market? How about for Wells Fargo?

 

https://reiwire.com/why-wells-fargo-is-re-entering-this-risky-loan-market/

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