Wells Fargo Stops Doing Limited-Doc GSE Loans

This is the first I have seen of proactively dropping Fannie/Freddie waivers by a large-named mortgage lender.

As you can take from Wells Fargo’s (WFC) message below Fannie and Freddie will still buy low documentation loans (pseudo-stated income) if their magic computer systems, DU and LP respectively, say the borrowers are a good risk. Typically Fannie/Freddie waivers are allowed on what they consider a ‘good’ borrower.  It is up to the lender whether they want to add overlays onto the GSE’s conditional approvals such as Wells has decided to do here.

So, what does it mean that Wells Fargo would stop doing this? I say a) they have $350 billion in mortgage exposure with Wachovia’s (WB) toxic assets, are sick of the failing asset class and want to curtail volume somewhat b) they don’t trust that the GSE’s will be there to buy the loans after Paulson leaves c) they may have some liability for funded loans going forward for these riskier loans if conditions change with the GSE’s d) they are unsalable loans to anyone else if the GSE’s go away.

Ultimately this means nothing for Wells Fargo.  Continuing light-doc GSE loans is probably not even a big deal considering they just took on nearly $150 billion in the most toxic loans ever created in the Wachovia purchase. But this is another hit to the housing market. Many self-employed borrowers or those living off of harder to document, irregular income such as dividend/interest or rental will have a much harder time getting a loan.

Below is a list of the top 10 banks by originations in Q3. While this decision to do away with GSE limited doc loans, it likely will not make much of a difference in their mortgage lending numbers. The housing market itself will see to that.

Posted in Categories: Contributor, Economy, External Research, Housing, USA.

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