Wells Fargo diving back into securities that fueled 2008 crisis
Wells Fargo just can’t help itself.
The nation’s third-biggest bank is planning to ramp up trading in controversial securities tied the mortgage market — just weeks after it paid a $2 billion fine for its role in the financial crisis, The Post has learned.
Headed by Chief Executive Tim Sloan, Wells Fargo is actively working on deals with non-bank mortgage lenders to package up home loans “in mass capacity” and sell them off to investors hungry for returns, according to a person directly familiar with the plans.
The packages — known as residential mortgage-backed securities, or RMBS — are among the wildly complex Wall Street debt concoctions at the center of “The Big Short,” the 2015 Christian Bale-starring movie that explained the 2008 financial crisis.
The revelation comes less than a month after Wells Fargo settled a 10-year-old Justice Department probe into the bank’s lending and sales practices of RMBS, before the crisis.
“They just got out of time-out, and they’re now going back into the playground they got in trouble in the first place,” the source said.
The bank, like other big Wall Street firms, misled investors about the quality of the mortgages from 2005 to 2008, causing investors to lose billions of dollars, the DOJ said.
Wells Fargo encouraged its underwriters “to take more chances, and be more aggressive, in approving loans that were outside of Wells Fargo’s underwriting guidelines,” according to the DOJ’s Aug. 1 consent order.
Still, after beating a retreat, Wells Fargo plans on moving aggressively into the market in the early days of the fourth quarter, the source said.
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It’s unclear which companies Wells is talking with, though its bankers have said they’re looking for mortgages to homeowners who are most likely to make good on their debt, the person said.
Nevertheless, the lenders Wells is looking at have attracted borrowers who tend to be low-income or first-time buyers, require backing from the federal government and have their mortgages bundled by Ginnie Mae — and who may not have qualified for a loan from Wells Fargo, insiders said.
Many of these are non-bank lenders, which have exploded in popularity in recent years. Quicken Loans, a non-bank lender, surpassed Wells as the biggest mortgage lender last year to take about 6 percent of the market.
“Wells — their Ginnie Mae production has gone to nothing,” one Wall Street source told The Post. “Really low. It’s a risk thing.”
Non-bank lenders have been “picking up the slack in Ginnie Mae [securities] for sure,” Scott Buchta, head of fixed-income strategy at Brean Capital, told The Post. “Ginnie Mae market share has increased thanks to growth in non-bank lending.”
That slack has been a boon for some homeowners — but also means homeowners are taking out bigger mortgages relative to their incomes.
“There’s less skin in the game and more levered borrowers, which is generally bad in a downturn,” Buchta told The Post.
Wells’ plan would challenge JPMorgan Chase and Morgan Stanley, which Wall Street insiders see as the largest RMBS traders in the market.
“We don’t comment on rumors and speculation,” Jessica Ong, a Wells Fargo spokeswoman, told The Post.
Wells’ expansion into RMBS comes as it is still reckoning with its fake-accounts scandals in 2016.
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