Get off the Stagecoach

There’s a new boss in town, and it is not the same as the old boss.

Community groups met with Wells Fargo’s senior management from the Carolinas yesterday.  A lot of the people came from what they refer to as “legacy Wachovia.” There were people from Home Mortgage, from REO disposition, from servicing, from deposit services, from diversity programs, and from small business lending.  We were flanked by leaders from some of North Carolina’s leading community development financial institutions.

It was odd, but what emerged was a sense that the leaders of legacy Wachovia had little or no sense of Wells’ track record. It is quite a track record:

Wells has been the nation’s largest 2-28 lender:  A 2-28 is a term to describe an adjustable rate mortgage with a teaser rate that jumps up after 2 years.  In most instances, the increased interest rates pumps monthly payments up by 35 or 40 percent.

The new Wells/Wachovia seems ready to put the Wells model in place for its mortgage operations.  A retail mortgage manager outlined their “affordable” mortgage product.  It was designed to get borrowers into mortgages, but it seemed to be void of any kind of “ability to pay” concerns.  It featured:

• lender can make down payment for borrower.
• Loan-to-value can be as high as 98 percent.
• no mortgage insurance required
• Maximum debt-to-income ratio is 42 percent.

This kind of lending seems designed to put more borrowers into problems.  The high loan-to-value and the high debt-to-income ratio mean that debt service will be challenging.  The new loan modification programs, which Wells is forced to comply with as a servicer (for 1 in 6 of all U.S. mortgages), works on the logic that debt-to-income ratios of more than 31 percent are not sustainable. Investopedia says that lenders should prefer no more mortgage than 28 percent of monthly income, and that DTI’s above 37 percent are very risky.

Moreover, the lack of mortgage insurance seems to increase the chance that there won’t be a backstop for investors when these borrowers encounter trouble.

Wells response, on a system-wide level, seems to be that they will mitigate their risk by putting more mortgages through FHA.

Wells is the nation’s largest financier of payday lending operations.  While payday loan shops are now illegal in North Carolina, that is not the case across the rest of the country.  In many communities, there are more payday loan operations than there are branch banks.  They charge usurious fees – usually $55 for a two-week loan of $245.  Do the math on those interest rates. This would be illegal in Canada.

Wells even has its own payday program, known as the Direct Deposit Advance, that charges a fee of 10 percent of your advance for a two-week loan.

Wells runs its branches like fee-machines.  It is not just that they charge you $35 for an insufficient funds fee (NSF).  That is pretty high, considering how many families are struggling to make ends meet.  Here is one indicator  – child hunger.  When a family has to take depend on school programs that send their kids home with backpacks full of donated food to provide basic meals on the weekends, then you know that people aren’t going to be able to afford an NSF charge.  This isn’t a rare event, either – in Kansas City, for example, more than 100,000 kids take home backpacks full of food every weekend. In North Carolina, schools are reporting that families are opting to not take standardized tests (SAT, ACT) used for college admissions unless they can get scholarships.

So, confronted with this budget problem, many people choose to drop out of the banking system.  Simple as that.  If you don’t understand how they can make fees, remember that they don’t draw money out based on the order of how you wrote your checks or when you made a debit transaction.  Instead, they wait until the entire day’s transaction have come in, and they withdraw based upon the size of the check.  The largest come out first.