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Wells Fargo Faces Scandal for Illegal Foreclosing on 400 Homes


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8/15/2018
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Wells Fargo Faces Scandal for Illegal Foreclosing on 400 Homes

In a quarterly report filed Friday, Wells Fargo disclosed that it illegally foreclosed on 400 families after denying modifications to qualifying homeowners.

Wells Fargo conducted an internal review which found 625 customers were denied modifications despite qualifying for relief — and that 400 of these homeowners lost their homes, even though they qualified for loss mitigation assistance under applicable federal programs. Servicing regulations in place at the time required the bank to consider homeowners for these programs.

The filing disclosed that Wells Fargo’s calculations included incorrect attorney’s fees and costs, pushing otherwise qualified applicants who could afford their payments into the ineligible range.  The homeowners affected were in the foreclosure process between April 13, 2010, and Oct. 20, 2015.

Wells Fargo said the problem was a “calculation error” resulting from a software glitch.  When calculating qualification for a federally backed program, like 2009’s Home Affordable Modification Program, or HAMP, legal fees and other bank collection costs are not added in to the formula denominator, which consists of the loan balance.  But, Wells Fargo decided to add-in attorney’s fees and other costs, which had the effect of disqualifying some homeowners who would have received loan modifications if the formula were calculated correctly.

After “substantially” completing its internal review to determine the scope of the problem, Wells Fargo set aside $8 million in the second quarter for damages and restitution to “remediate customers whose modification decisions may have been affected by the calculation error.”  While this might seem generous at first blush, it is really a pittance.  Each homeowner affected would only receive $20,000, which hardly scratches the surface of moving and relocation costs, let alone lost equity, negative credit effects, intangible costs for losing one’s home, emotional distress and turmoil, and detrimental reliance.

“We will continue to assess any customer harm and provide remediation as appropriate,” Wells said in the filing.

“Customer harm” is something that has to be considered in its proper context.  By 2010, Wells Fargo was one of the top three mortgage servicers in terms of foreclosure activity, with approximately $17.5 billion worth of foreclosed homes on its books.  During the same timeframe of 2010-to-2015 when this one “glitch” that we know about improperly steered a group of homeowners into foreclosure and sale – Wells Fargo received $1.5 billion in HAMP incentive payments from the U.S. government for servicing troubled loans subject to loss mitigation.  Along with JPMorgan Chase, Bank of America, and Ocwen, Wells Fargo was one of the “Big 4” mortgage servicers.  But, only 17.5% of the HAMP incentives Wells Fargo received went to homeowners. 

The rest were paid out to investors or padded Wells Fargo’s bottom-line.  Wells Fargo benefited from these illicit activities by pocketing: #1) the federal incentive funds that came from taxpayer dollars; #2) investor payments procured through lies about the riskiness of the loans in question; #3) homeowner equity stolen through illegal foreclosures; and #4) receipts or write-offs stemming from improper fees and costs improperly allocated to homeowner’s accounts. 

With the sweeping penumbra of illegality cast by Wells Fargo across the mortgage landscape, “customer harm” extended to systemic abuse on an unprecedented scale.  Let’s not forget that in 2006, Wells Fargo originated approximately $74.2 billion in subprime loans, making the bank the nation's top subprime lender.  Moreover, it could be argued that the aggressive and illegal sales practices of Wells Fargo – stated-income applications, interest-only products, option ARMs, etc. – started a race to the bottom in the mortgage lending and mortgage-backed securities business, where other banks were pressured to compete with these unfair trade practices which in many cases started at Wells Fargo.

Wells Fargo Hit With $2.1 Billion Justice Department Fine for Fraudulent Stated-Income Loans

Earlier this week, the Justice Department announced Wells Fargo agreed to pay a $2.1 billion fine for issuing mortgage loans it knew contained incorrect income information. https://www.justice.gov/usao-ndca/pr/wells-fargo-agrees-pay-209-billion-penalty-allegedly-misrepresenting-quality-loans-usedThis investigation dealt with “stated-income loans” issued by Wells Fargo which led to the 2008 financial crisis and the Great Recession.  It turns out that Wells Fargo was churning out loans on over-stated income applications Wells Fargo helped to doctor, where the prospective borrowers had 65% less income than was needed to qualify, after review of the borrowers most recent tax returns through 4506-T requests conducted after the fact.

The Justice Department press release stated:

“This testing revealed that more than 70% of the loans that Wells Fargo sampled had an “unacceptable” variance (greater than 20% discrepancy between the borrower’s stated income and the income information reflected in the borrower’s most recent tax returns filed with the IRS), and the average variance was approximately 65%.”

The Justice Department reported that after learning of these results through internal reporting conducted by quality control analysts, Wells Fargo intentionally decided not to correct course, and instead doubled-down on stated applications:

One Wells Fargo employee in risk management observed that the “4506-T results are astounding” yet “instead of reacting in a way consistent with what is being reported WF [Wells Fargo] is expanding stated [income loan] programs in all business lines.”

Wells Fargo sold these same loans to investors without disclosing the inaccurate income levels, and misled investors into thinking that the solid debt-to-income ratios for these loans made them “low risk.”  Simultaneously, Wells Fargo unloaded these same securities from its own investment portfolio, selling these loans into the secondary market without disclosing their risk profile to investors, insulating Wells Fargo from these loans that were designed to fail.  Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to the investors they misled. 

Wells Fargo’s $4mm SEC Settlement for Securities Fraud

Then, in June, Wells Fargo was subject to an SEC probe it settled for a $4 million penalty plus disgorgement for "improperly encouraging" brokerage clients to actively trade high-fee debt products that were intended to be held to maturity.  By encouraging trades in these volatile and complex securities, Wells Fargo wracked-up fees, but the brokers recommending these “flipping” trades didn’t do an analysis of whether there was a “net benefit” to the customer and "did not reasonably investigate or understand the significant costs of the recommendations." 

Essentially, brokers thoughtlessly pushed clients into these products to generate profits for the bank, when in many cases the costs and fees exceeded the value of the potential return on the contemplated transactions, and in many cases the transactions reduced the investors return on investment.  The SEC alleged that Wells Fargo targeted relatively unsophisticated mom-and-pop investors for the “flips” who did not meet the risk profile for these high-risk securities.

Wells Fargo has already been under intense scrutiny for the better part of the past two-years.  The genesis of the string of scandals that have plagued the bank started with the revelation in 2016 that Wells Fargo had illegally opened 3.5 million unauthorized “phantom” accounts without their customers’ permission in order to generate fees.  This resulted in a $185 million fine and restitution for the affected customers.

Recently, in June, Wells Fargo faced a different loan modification scandal for placing unauthorized charges on homeowners who were in bankruptcy court.  This was a staggering scam executed with indifference to the jurisdiction of the bankruptcy court over debtors and the fact that modifications of payment plans entered into in bankruptcy are subject to court approval and monitoring. 

Wells Fargo was making unsolicited loan changes that extended the maturity dates of loans held by bankrupt debtors for decades.  The payments would go down slightly, but the profits to Wells Fargo would go up substantially.  These loan changes entitled Wells Fargo to seek government payments of about $1,600 per loan, in addition to the additional interest they’d stand to collect over the life of the loans. 

A class action lawsuit documented the pattern of Wells Fargo “filing false documents” and lying to the federal government to receive additional incentive payments.  68,000 homeowners were affected and Wells Fargo settled for $81.6 million.  What is morally repugnant and offensive is that Wells Fargo, in this case, is taking advantage of the most vulnerable among us who are least prepared to defend themselves—people who are broke. 

The level of greed present here is hard to grasp.  The thought of a multinational banking institution lying to the government and picking the pockets of bankrupt and penniless debtors for a few thousand extra dollars of profit is horrifying.  One judge called the practice “beyond the pale of due process.”

Wells Fargo’s April $1bn CFPB Settlement for Mortgage and Auto Fraud

Back in April, Wells Fargo agreed to pay a $1 billion fine as a settlement to end probes into consumer frauds that were rampant in its mortgage and auto loan businesses.  The fine was levied by the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau, and was the biggest fine of its kind to date.

Some of the offensive practices the bank engaged in were found to be outright scams.  For instance, Wells Fargo intentionally delayed loan closings and then used the delay they created to force homeowners into a Hobson’s choice between paying a lock-in fee to maintain their mortgage rate – pure profit to the bank – or paying higher mortgage rates for the life of the loan.  Homeowners invariably chose the former and Wells Fargo pocketed the cash.  In another classic scam, Wells Fargo made auto loan customers buy insurance from the bank that they didn’t need; another up-front cash grab that went straight to the bank’s bottom-line.

Wells Fargo Ordered by Fed Not to Grow in Size While Abuses Persist

In February, the Federal Reserve cited those and other issues when it ordered the bank to stop growing until it can prove to regulators that it has systems in place to prevent consumer abuses.  This was one of Fed Chairman Yellen’s final salvos before leaving office.

Even President Trump, who is one of the more pro-bank Presidents in recent memory, scolded Wells Fargo, expressing outrage at the outright fraudulent schemes that were uncovered.  “Fines and penalties against Wells Fargo Bank for their bad acts against their customers and others will not be dropped, as has incorrectly been reported, but will be pursued and, if anything, substantially increased,” Trump tweeted in December. “I will cut Regs but make penalties severe when caught cheating!”

National Home Affordability Hits 10-Year Low As Abuses from the Subprime Mortgage Crisis Continue to Plague Banks

On August 9, 2018, the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) was released.  An ironically named report.  The news was not good.

In all, only 57.1 percent of new and existing homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $71,900.  Keep in mind this is the median, but the mean is much lower at about $55,000 per family.  This represents about a 5% drop in affordability from homes sold in the first quarter and the lowest reading since mid-2008 just after the Great Recession started. 

Housing just got more expensive by about the same rate as housing has become increasingly unaffordable.  In just the last quarter, housing prices have increased by 5% on average, and average mortgage rates have jumped 30 basis points from 4.34 percent to 4.67 percent.

The rental situation is just as bad.  Rental prices are up 3.6% from a year ago, with the average rental in the U.S. reaching an all-time high of over $1,500/mo.  As a new wave of foreclosures has begun to flood the market, renters are not paying and landlords are becoming more selective, leading to a glut of affordable housing, which is hitting millennials and new entrants the hardest.  In addition, with U.S. average household savings and net worth levels below $1,000 per family and lower for new entrants to the labor force, an increasingly small percentage of the population have sufficient savings to put down a security deposit.

According to new CPI data, 25% of renters in the United States are struggling to find housing and can’t qualify for a rental or afford to place a security deposit.  60% of the increase in the Consumer Price Index (“CPI”) over the last several quarters is attributable to increased housing costs.

Demand, at historically inelastic levels, has not responded to these price increases, with sales falling off a cliff.  Whereas most Americans are struggling to afford historically high housing costs and subprime loans re-emerging to offer reprieve from the impossible affordable housing dilemma, a fresh problem has emerged and exacerbated existing symptoms – student loans. 

In the last decade alone, student debt has surged by nearly 60 percent, which is forecast to reach a level of $2 Trillion by 2021.  The average payments are on par with average mortgage payments.  With average housing costs approaching 2/3 of take-home pay, and minimum interest-only student loan payments approaching 2/3 of take-home pay for the average person in the U.S., the math doesn’t add up, and many people have to deal with the Hobson’s Choice between paying one debt or the other, lacking the ability to pay both.  For households with two working parents who both have student loan debt, the situation is especially byzantine.

Core CPI data indicates that we are close to the 2.4% cost of living increase that has only been seen immediately prior to severe recessions.  In November of 2007 when Lehman collapsed, Core CPI increases briefly reached 2.44% in that month – a level we are flirting with this fall—and then Core CPI increases declined below inflationary levels for four-years straight years as the U.S. entered into the Great Recession and the housing market collapsed.

http://www.investmentnews.com/article/20180806/FREE/180809964/wells-fargo-discloses-accidental-foreclosures-tax-credit-probe

http://fortune.com/2018/08/04/wells-fargo-bank-foreclosure/

https://nypost.com/2018/08/05/wells-fargo-admits-glitch-led-to-hundreds-of-home-foreclosures/

https://money.cnn.com/2018/08/04/news/companies/wells-fargo-mortgage-modification/index.html

https://www.reuters.com/article/us-wells-fargo-penalty/wells-fargo-to-pay-2-09-billion-fine-over-loan-quality-doj-idUSKBN1KM5TR

https://www.justice.gov/usao-ndca/pr/wells-fargo-agrees-pay-209-billion-penalty-allegedly-misrepresenting-quality-loans-used

https://www.nytimes.com/2017/06/14/business/wells-fargo-loan-mortgage.html?rref=collection%2Ftimestopic%2FLoan%20Modifications&action=click&contentCollection=your-money&region=stream&module=stream_unit&version=latest&contentPlacement=4&pgtype=collection

https://www.nahb.org/en/news-and-publications/press-releases/2018/08/housing-affordability-hits-ten-year-low-in-second-quarter.aspx

https://www.housingwire.com/articles/46414-housing-affordability-reaches-10-year-low

https://www.marketwatch.com/story/with-rent-surging-these-startups-offer-to-pay-the-security-deposit-2018-08-10

https://nypost.com/2018/08/11/us-students-may-collectively-owe-2t-in-loans-by-2021/



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