The nation’s largest mortgage lender has agreed in principle to settle a longstanding lawsuit with the United States Department of Justice and the Department of Housing and Urban Development (HUD) over faulty FHA loans the company originated from 2001 until 2010.
In an SEC filing released this week, Wells Fargo said it would pay $1.2 billion to resolve certain civil claims that the Federal Government had lodged against it for making FHA loans that quickly soured.
It also covers “potential civil claims relating to the Company’s FHA lending activities for other periods.”
Reckless Trifecta
The bulk of the suit relates to a claim made in late 2012 that Wells took part in a the “reckless trifecta” of deficient training, underwriting, and disclosure, all while exploiting the backstop of government insurance.
Manhattan U.S. Attorney Preet Bharara claimed the bank aimed for quantity over quality, incentivizing volume with bonuses instead of making sure good loans were being originated.
This involved giving “improper bonuses” to underwriters to ensure they approved as many loans as possible, while also hiring temporary staff and failing to properly train them.
And even if the loans turned out to be bad news, Wells Fargo apparently hid that fact to avoid any scrutiny or indemnification.
Wells allegedly certified that some 100,000 FHA loans between May 2001 and October 2005 met HUD’s requirements and were eligible for FHA insurance despite knowing a substantial portion were unacceptably risky.
In fact, during some months nearly half of the FHA loans originated didn’t meet HUD’s requirements because the bank failed to determine if borrower’s could actually pay back the loans.
Wells Said Only 300 FHA Loans Were Bad
The suit also alleged that between October 2005 and June 2011, Wells Fargo only reported about 300 loans to HUD as “seriously deficient” despite thousands carrying that distinction.
And before that didn’t report a single loan as having material underwriting violations or fraud until after a HUD-conducted lender review took place in 2005.
Before that the company was self-reporting its FHA loan quality. By their own account, Wells internally identified 6,558 seriously deficient loans, but supposedly hid 6,320 of them from HUD.
That total included a whopping 3,142 loans that contained early payment defaults, or loans that were 60 days late within just six months. In other words, really bad loans that didn’t have a shot and probably shouldn’t have been approved.
As a result, HUD had to pay out roughly $190 million dollars in insurance claims for defaults on those loans. Apparently millions more was paid out due to Wells not disclosing the early payment defaults.
Will Homeowners Be Compensated?
The original suit makes no mention of whether borrowers or past homeowners will receive any compensation as a result of the settlement.
In fact, the word “borrower” was written only once and “homeowner” was never mentioned, so it’s unclear if individuals will receive any compensation as a result of this massive payout.
It sounds like Wells Fargo just made a bunch of bad loans, as most companies did at the time. Whether homeowners were injured as a result is another question.
Interestingly, Wells agreed to lower credit score requirements for FHA loans to 500 from 600 back in 2011 after pressure from HUD and housing advocates.
However, the bank only made the change in its retail channel and required a 10% down payment along with a maximum DTI of 31% to offset that terrible credit risk.
Whether this will affect their future ability/motivation to underwrite FHA loans remains to be seen, but it could certainly damage the relationship.
Quicken Loans, the self-described “nation’s largest FHA lender,” actually preemptively filed a suit against HUD and the Department of Justice last year to put to an end a three-year investigation.
In other words, you might be getting your FHA loan from a…smaller lender.