Wells Fargo's Subprime Mortgage Accounting: A Recipe For Disaster

Wells Fargo, the largest US mortgage lender, has had a history of involvement with subprime mortgages. In 2014, the company was criticised for edging back into the subprime market, with some arguing that it was targeting customers with weaker credit scores. Wells Fargo has faced legal issues related to its subprime mortgage practices, including a $2 billion settlement in 2018 for allegedly lying about the quality of subprime mortgages. The bank has also been accused of discrimination in its lending practices, with a $175 million settlement reached in 2023 to compensate African-American and Hispanic borrowers who were placed into subprime loans when similarly qualified white borrowers received prime loans.

Wells Fargo's role in the subprime mortgage crisis

Wells Fargo, the largest mortgage lender in the US, has played a significant role in the subprime mortgage crisis. In the lead-up to the 2008 financial crisis, Wells Fargo was involved in the issuance of risky subprime mortgages, which contributed to the instability of the US housing market.

In 2018, Wells Fargo agreed to pay a $2 billion settlement for allegedly lying about the quality of subprime and Alt-A mortgages that backed residential mortgage-backed securities before the housing crisis. The Department of Justice (DOJ) asserted that Wells Fargo knew that the loans backing these mortgage bonds were based on misstated income information but allowed them to be securitized and sold anyway. As a result, investors who purchased these securities suffered significant losses when borrowers defaulted on their loans. Wells Fargo's actions, along with those of other big banks, contributed to the financial crisis that devastated millions of Americans.

Wells Fargo has also faced allegations of discrimination in its mortgage lending practices. In 2023, the Department of Justice reached a $175 million settlement with Wells Fargo to resolve fair lending claims. The settlement alleged that between 2004 and 2008, Wells Fargo discriminated by steering approximately 4,000 African-American and Hispanic borrowers into subprime mortgages when similarly qualified non-Hispanic white borrowers received prime loans. Wells Fargo's subjective pricing discretion resulted in African-American and Hispanic borrowers paying higher fees and interest rates than their white counterparts due to their race or national origin.

In recent years, Wells Fargo has been cautious about its mortgage lending practices, avoiding the riskiest loans and adhering to stricter lending standards. However, as of 2014 and 2019, Wells Fargo has been reported to be tiptoeing back into the subprime mortgage lending market, targeting borrowers with weaker credit scores. While the bank claims to have resolved its crisis-era mortgage issues, it still faces ongoing lawsuits and settlements related to its mortgage practices.

Wells Fargo's settlement with the Department of Justice

In 2012, Wells Fargo reached a settlement with the U.S. Department of Justice (DOJ) regarding claims of discriminatory mortgage lending practices. The DOJ alleged that between 2004 and 2008, Wells Fargo steered approximately 4,000 African-American and Hispanic wholesale borrowers into subprime mortgages when similarly qualified non-Hispanic white borrowers received prime loans. The settlement also addressed allegations that between 2004 and 2009, Wells Fargo charged approximately 30,000 African-American and Hispanic wholesale borrowers higher fees and rates than non-Hispanic white borrowers due to their race or national origin.

Wells Fargo's business practices allowed loan officers and mortgage brokers to vary loan interest rates and fees from the set price based on objective credit-related factors. This subjective pricing discretion resulted in African-American and Hispanic borrowers paying more. The DOJ claimed that Wells Fargo was aware of the discriminatory fees and interest rates but failed to take effective action to stop them.

As part of the 2012 settlement, Wells Fargo agreed to conduct an internal review of its retail mortgage lending and compensate African-American and Hispanic retail borrowers who were placed into subprime loans when similarly qualified white borrowers received prime loans. This compensation was in addition to the $125 million to $184.3 million in compensation for wholesale borrowers who were victims of discrimination. The settlement was the second-largest fair lending settlement in the DOJ's history.

In 2018, Wells Fargo agreed to pay a $2.09 billion penalty to the DOJ for allegedly misrepresenting the quality of loans used in residential mortgage-backed securities. The United States alleged that Wells Fargo failed to disclose income discrepancies identified by its fraud controls and took steps to insulate itself from the risks of its stated income loans. Wells Fargo sold a large number of these loans between 2005 and 2007, with nearly half defaulting and resulting in significant losses for investors.

Wells Fargo's return to subprime lending

Wells Fargo, the largest US mortgage lender, has been accused of several scandals in the last few years. In 2018, the Department of Justice announced that Wells Fargo would pay over $2 billion for allegedly lying about the quality of subprime and Alt-A mortgages that backed residential mortgage-backed securities in the run-up to the housing crisis. Wells Fargo allegedly knew that the loans that went into the mortgage bonds in question were based on misstated income information. The bank, however, denied liability and said it was "pleased to resolve this legacy issue".

In 2023, Wells Fargo agreed to pay a $2.1 billion fine to settle allegations that it misrepresented the types of mortgages it sold to investors during the housing bubble. The government accused Wells Fargo and other big banks of understating the risk and quality of the mortgages they sold to investors at the height of the housing bubble, between 2005 and 2007. Wells Fargo is one of the last remaining big banks to settle charges related to its role in the subprime mortgage crisis.

In 2014, Wells Fargo was also accused of discriminating against qualified African-American and Hispanic borrowers in its mortgage lending from 2004 through 2009. The Department of Justice reached a settlement with Wells Fargo, resulting in more than $175 million in relief for homeowners to resolve fair lending claims.

Despite these scandals, Wells Fargo is edging back into subprime lending as the US mortgage market thaws. Wells Fargo is the first big bank to do so, with other smaller companies outside the banking system, such as Citadel Servicing Corp, also ramping up their subprime lending. To avoid the negative associations with the word "subprime", lenders are calling their loans "another chance mortgages" or "alternative mortgage programs". Lenders claim to be stricter about the loans than before the crisis, with borrowers needing to make high down payments and provide detailed information about income, work histories, and bill payments. Wells Fargo has started targeting customers that can meet strict criteria, including demonstrating their ability to repay the loan and having a documented and reasonable explanation for their subprime credit score.

Wells Fargo's acquisition of Wachovia and its impact on subprime mortgages

Wells Fargo's acquisition of Wachovia in 2008 was a significant event that had a notable impact on the subprime mortgage landscape in the United States. Here is a detailed account of the acquisition and its implications:

Wells Fargo's Acquisition of Wachovia:

In 2008, Wells Fargo demonstrated its resilience during the financial crisis by acquiring Wachovia Corporation, a financial holding company headquartered in Charlotte, North Carolina. This move created North America's most extensive distribution system for financial services. The integration of Wachovia's 3,300 retail financial centers across 21 states and its international presence with Wells Fargo's existing infrastructure resulted in a vast network of approximately 4,600 retail banking branches and over 11,000 ATMs. The deal was valued at $15 billion, outbidding Citigroup's initial offer of $2.2 billion.

Impact on Subprime Mortgages:

The acquisition of Wachovia had a direct impact on Wells Fargo's exposure to subprime mortgages. Wachovia was a victim of the financial meltdown, saddled with billions of dollars in toxic mortgage assets. As a result of the acquisition, Wells Fargo inherited a substantial portfolio of "Pick-A-Pay" mortgages, where borrowers could defer payments. These loans suffered significant losses, and Wells Fargo had to navigate the challenges associated with these underperforming assets.

Despite this inheritance of risky mortgages, Wells Fargo's overall approach to subprime lending differed from some of its competitors. Notably, Wells Fargo avoided certain types of risky loans, such as option adjustable-rate mortgages, which contributed to the financial crisis. This cautious approach positioned Wells Fargo relatively favorably compared to other financial institutions that were heavily impacted by the subprime mortgage crisis.

In the aftermath of the financial crisis, Wells Fargo adapted its lending strategies. By 2014, Wells Fargo cautiously re-entered the subprime mortgage market as the U.S. mortgage market showed signs of recovery. The bank started targeting customers with lower credit scores, down to 600, who could meet strict criteria, including demonstrating their ability to repay loans. This shift indicated a potential breakdown of the wall between prime and subprime borrowers, as lenders sought to expand their reach.

In summary, Wells Fargo's acquisition of Wachovia during the turbulent economic times of the late 2000s had a significant impact on its involvement with subprime mortgages. While Wells Fargo inherited a substantial portfolio of risky mortgages, it also positioned itself as a major player in the financial services industry, allowing it to weather the crisis better than some of its competitors. The acquisition's long-term impact on Wells Fargo's subprime mortgage strategies evolved over time, with the bank cautiously re-entering the subprime market years later.

Wells Fargo's discrimination against African-American and Hispanic borrowers

Wells Fargo has been accused of discriminating against African-American and Hispanic borrowers by pushing them towards subprime mortgages. In 2012, the bank agreed to pay $175 million to settle a case brought by the Department of Justice, which alleged that Wells Fargo steered thousands of African-American and Latino borrowers into more expensive loans than those offered to similarly qualified white borrowers. The government alleged that about 4,000 African-American and Hispanic borrowers were pushed into subprime mortgages when white borrowers with similar credit profiles received prime loans. Wells Fargo has also been accused of charging higher interest rates to Black borrowers compared to white borrowers with similar credit scores.

The issue of Wells Fargo's discriminatory practices has a long history. In 2012, the bank agreed to pay at least $175 million to settle accusations that it discriminated against African-American and Hispanic borrowers in violation of fair-lending laws. The bank was also sued by the city of Philadelphia in 2017, with a complaint alleging that Wells Fargo violated the Fair Housing Act of 1968 by "steering" minority borrowers into mortgages that were more expensive and riskier than those offered to white borrowers. Miami also sued Wells Fargo, arguing that its discriminatory lending practices led to higher default rates for minority borrowers.

Wells Fargo has also faced similar claims of mortgage discrimination from bank regulators and federal prosecutors. In 2019, the Pennsylvania Human Relations Commission filed an investigative complaint, and in 2009, the State of Illinois filed litigation on behalf of borrowers alleging discrimination. In 2022, Wells Fargo was again sued for discriminating against African-American and Hispanic borrowers, with plaintiffs seeking $5 million in damages. The lawsuit alleged that the bank approved more mortgage loans for white borrowers compared to Black applicants in 2020 when the federal CARES Act created historically low-interest rates due to the COVID-19 pandemic.

Wells Fargo's discriminatory practices have had significant financial implications for its minority borrowers. The higher interest rates and fees charged to African-American and Hispanic borrowers have resulted in higher costs and increased financial burden for these individuals. The impact of Wells Fargo's actions has been widespread, with allegations of a pattern or practice of discrimination against qualified African-American and Hispanic borrowers from 2004 through 2009. The bank's actions have contributed to a history of "redlining," a practice traced back to the 1930s that involves denying credit to borrowers in certain communities based on their race or ethnicity.

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