Wells Fargo Cuts Off Mortgage Brokers: Consumer Primer

As of today, Wells Fargo became the latest major firm to stop taking loans from mortgage broker firms. Below is a report from Bloomberg, then some comments from me as a mortgage banker.

Wells Fargo & Co., the largest U.S. mortgage lender, said it will stop funding loans originated and sold by independent mortgage brokers after settling a federal fair-lending investigation.

After tomorrow, the company won’t accept new applications for loans originated by independent mortgage brokers in its wholesale channel, according to a statement today from the San Francisco-based firm. The lender said it will still process and close existing applications.

Wells Fargo agreed today to pay $125 million to settle U.S. claims that it discriminated against minority borrowers in making residential loans. The decision to exit wholesale was made by Wells Fargo “on its own volition,” the bank said in a statement about that accord.

The company made $7.4 billion of mortgages through brokers in the first quarter, the most of any lender and 21 percent of the industrywide total, according to Inside Mortgage Finance, a trade publication. The loans made up about 5 percent of the company’s total, according to the statement.

[follow reporter Dakin Campbell]

For consumers to understand what this means, here’s a breakdown of the three main channels through which loans are made to consumers:

(1) Retail banks which make loans to consumers, then sell the underlying loans to investment firms, Fannie Mae, or Freddie Mac who bundle the loans into mortgage bonds (aka mortgage backed securities or MBS). But they usually keep servicing rights so the consumer gets their monthly statement from the retail bank.

(2) Mortgage banks which make loans to consumers, then sell the underlying loans to retail banks, investment firms, Fannie Mae, or Freddie Mac who bundle the loans into MBS. Larger mortgage banks may keep servicing rights so the consumer gets their monthly statement from the mortgage bank, and smaller ones sell servicing rights along with the loans.

(3) Mortgage brokers which get loans for consumers through retail banks or mortgage banks. The loan is funded and usually also serviced by that retail or mortgage bank.

Wells is shutting down its unit that accepts loans through mortgage brokers (#3 above) so they can focus solely on making loans through its retail division (#1 above). And they have been doing well in this area as other big firms like BofA, Citi, and MetLife have pulled back or exited mortgages all together.

So if you’re a Wells borrower, you can still get a loan there.

Mortgage brokers relying heavily on Wells broker division as a source to take client loans to will be scrambling a bit. If you’re a consumer working with a mortgage broker, ask them who they’re taking your loan to. Most are close to the chest on this, but pull it out of them. You have a right to know, and it must be disclosed to you in writing during the loan process anyway.

The Wells move continues a trend of big banks choosing to focus on retail and mortgage bank channels because—in the wake of ever increasing Finreg, CFPB, and other regs—these firms are looking for ways to control risk and quality of originations. They believe it’s easier to do through through retail and mortgage bank channels than it is through the broker channels.

Read the ‘BofA Cuts Off Mortgage Bankers’ story I’ve linked below for more on this trend and what it means for consumers.
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Reference:

Wells Fargo To Exit Wholesale Channel After Fair-Lending Accord (Bloomberg)

Mortgage Banker View: BofA Cuts Off Mortgage Bankers (TheBasisPoint)

MetLife Completes Exit From All Mortgage Businesses (TheBasisPoint)

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