After years of hearing negative mortgage news, I have become numb to refinance guideline tightening, lenders going out of business and mortgage giants shedding jobs.  For some reason though when Wells Fargo Home Mortgage announced they were eliminating almost 4,000 jobs in their home finance division, I started to wonder —- How could this happen to them? Wells Fargo is a conservative mortgage lender that never sold risky mortgage products like Option ARM’s, No Income No Asset home loans, 125% home equity loans, etc.  

Wells Fargo announced today that they were closing their mortgage lending division that was originating subprime mortgages.  I started thinking again—–Wells Fargo did not originate has not been originating subprime loans, but they did buy Wachovia who bought World Savings and they certainly originated risky loans.  World Savings was the first wholesale lender that extended option ARM loans to mortgage brokers nationwide.  Option ARMs are the high risk loans that featured a negative amortization loan payment option.  That means that borrowers had the ability to pay less than an “interest only” and the deficit would be applied at the end of the year to the borrower mortgage balance.  These loans were the first of their kind, because borrowers could have their outstanding mortgage balance compounding negatively like a credit card.  For years World Savings succeeded with the negative amortization loans because they had strict underwriting criteria that required the borrower to demonstrate they had they ability to pay the loan back. 

To get approved for the Option ARM, borrowers needed to supply income documentation and have home equity that was assessed by a licensed local appraiser.  Self-employed borrowers loved the World Savings Option ARMS because it gave them the ability to pay less in month’s in which their cash flow was low.  World Savings offered bad credit mortgage loans to borrowers who had a significant amount of home equity and income that could be documented. After a while however, World Saving got sucked into the competitive mortgage broker market as Countrywide and WAMU were pushing competitive Option ARM products that paid high yield spread premiums that made loan officers wealthy.  All the while, Wells Fargo never jumped into the option ARM market.  The company maintained it did not want to put their prime loan portfolio in jeopardy because they did not believe the Option ARM product was a good risk.  Wachovia Corporation, another prime lender could not resist the option ARMs and the lure of these exotic home loans so they bought World Savings.

In 2006 the subprime mortgage crisis exploded when home loan lenders started going out of business as loan defaults started mounting.  Home values started plummeting nationally and in 2007 the economy took a turn for the worst.  In 2008 employment skyrocketed and mortgage giants like WAMU and Wachovia were on the verge of bankruptcy.  The government stepped in and brokered Chase to take-over WAMU and Wells Fargo to take-over Wachovia.    

Don’t you find it interesting that after years of refusing to originate the risky option ARM product that Well Fargo went out and bought, Wachovia who just failed because they bought the biggest option ARM lender, World Savings?  I find it strange that after nearly escaping the mortgage industry debacle because of their wavering from their conservative lending philosophy that Wells Fargo would make this kind of catastrophic investment.  Did they ever think to do a back-ground check on this billion dollar bank they were buying?  This is sad because 4,000 people would still have their job today at Wells if it were not for this impulsive and uncharacteristic transaction.  Maybe they should take a page from Obama and blame their mistake on Bush.  Regardless of this giant financial blunder, Wells Fargo is still a great company that will survive the series of crisis’s and continue to be America’s most trusted mortgage lender.   

Moving forward, I would anticipate Wells Fargo will originate more government finance programs like FHA and VA.  Since 1934, FHA home loans have performed better than conventional mortgage products and the government continues to insure FHA refinance and home purchase loans.  VA home loans are another good bet, because Wells know that the borrowers have the income in the military and again the government guarantees these loans as well. 

I would not hold my breath for Wells to reopen and of their subprime lending divisions anytime soon, nor would expect them to roll out competitive jumbo mortgage loan programs until the housing sector begins to actually rebound. 

I’m sure Wells will continue to originate conventional mortgages because that is what they have always done well.  The bottom line is that Wells Fargo maintains that good credit borrowers that can document their income deserve low rate home mortgages with minimal lending fees.  The company offers stellar customer service and typically their loan officers have extensive financing experience.  And who can argue with Wells Fargo on the prime lending criteria as it has performed well through 6 wars and they have been lending for more than half of the time that the United States of America has existed.  Some critics may consider the Wells Fargo layoffs to be a setback for the mortgage industry but it is my contention that Wells Fargo is taking a few steps back in an effort to regroup and survive.  Like the Los Angeles Lakers did after the 3^rd quarter in game 7 against the Celtics, sometime you need a time-out to shake off your mistakes so you get get back and focus on what you are good at.  Like the Lakers with basketball, people will associate Wells Fargo with mortgage lending for many years to come.