Banks rush to fix system they broke

Wells Fargo, Citigroup, J.P. Morgan Chase and other huge mortgage lenders are falling over themselves to introduce mortgage-remediation programs designed to keep creditworthy borrowers out of foreclosure.

They should. They helped create the mess.

They offered variable-rate and subprime mortgages to customers with questionable credit or bought questionable mortgages from shady brokers from north Minneapolis to North Oaks.

Last week, Twin Cities officials were praising Wells Fargo and three other national lenders for agreeing to give a local nonprofit housing agency first bid on discounted homes coming out of foreclosure.

That means that Minneapolis and St. Paul and key nonprofit developers can pick off strategic properties for their efforts to rebuild neighborhoods devastated by foreclosures. The program is the pilot for a national initiative expected to expand soon to Cleveland and New York.

Deutsche Bank, Wells Fargo, U.S. Bank, J.P. Morgan Chase, and Bank of America (Countrywide) are among the biggest holders of foreclosed property.

As early as 2004, my colleague Dee DePass was writing about risky loans made to subprime borrowers in north Minneapolis and elsewhere by Wells Fargo Finance, the high-rate consumer-loan subsidiary of huge Wells Fargo & Co. But Wells Fargo has not been implicated as a major subprime mortgage abuser.

Paying for past mistakes

Regardless, too many lenders were failing to require that borrowers meet simple underwriting standards or that first-time borrowers attend the critical home-ownership classes, steps that were standard operating procedure in the good old days. But that was before the go-go era of artificially low interest rates, lax underwriting standards and aggressive mortgage brokers that led to the foreclosure crisis.

"Wells Fargo's size and visibility made them an easy culprit to point fingers at, but they are not the worst," said Don Samuels, a City Council member from north Minneapolis. "Wells Fargo was doing good things, but also some of that subprime. For a while, my well-heeled friends were asking me what was causing this. It was about greed. But these [borrowers] were all being accused of being ignorant and not reading the fine print."

And the foreclosure plague, although concentrated at first in the inner cities, has spread to affluent suburbs and new developments on the fringes of the metropolitan area.

The Bush administration and Federal Reserve that failed to regulate the mortgage industry until it was too late, now are in the process of injecting $700 billion to thaw frozen credit markets. What a mess.

Wells Fargo is the largest individual holder of bank-foreclosed properties in the Twin Cities area with 603 homes as of Sept. 30, according to proprietary data provided to subscribing lenders by First American Corelogic. Wells owns 7 percent of the 8,266 bank-owned houses in the Twin Cities area. That compares with 5 percent for U.S. Bank, and 4 percent each for Citibank, Deutsche Bank and Countrywide, a subprime national leader that had to sell itself to Bank of America.

But those figures understate the case. The Mortgage Entry Registration System, or MERS, is credited with owning one-fifth of the foreclosed houses. MERS is owned by 26 mortgage originators and buyers of brokered loans, including Wells Fargo, Chase, CitiMortgage, Countrywide, Merrill Lynch, Washington Mutual and several other lenders tarnished or put out of business by the subprime debacle.

Wells Fargo, the nation's largest mortgage company, said its foreclosure rate of 1.06 percent runs substantially below the 1.3 percent average for the mortgage industry. "Our foreclosure rate includes loans Wells Fargo originated and loans we service for other lenders and investors," said Wells Fargo spokeswoman Peggy Gunn.

She also said that 70 percent of Wells Fargo customers who are at least 60 days delinquent are working on restructurings or alternatives that are more-economical and less-traumatic alternatives to foreclosure.

Good reasons to help

Wells Fargo has emerged a local and national leader in trying to prevent more foreclosures. However, Wells and other banks aren't entirely altruistic in efforts to keep borrowers in their houses.

So far, the feds have invested $300 billion into the nation's biggest banks. And what often doesn't get said is that now, with Uncle Sam watching as a shareholder, the banks better fix the system or the government may nationalize the mortgage market, at least temporarily.

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., favors a blanket loan-forebearance program for millions of troubled borrowers. It would be a mandatory, federally designed program that the banks would have to implement. Bair estimates that the plan would keep 2.2 million houses off the foreclosure list at a cost of $25 billion to the lenders and the taxpayers. The government probably would only focus on homes worth $400,000 or less.

But lenders don't want cookie-cutter mandates. And they worry that the Obama administration may take this approach. Wells Fargo declined to comment on pending legislation.

To homeowners in need, $25 billion is a small price compared with the $350 billion that the government has committed or invested in the nation's largest financial institutions, including those run by ousted fat cats at AIG Insurance, Fannie Mae and Freddie Mac.

"It's the job of government to set the rules that make markets work for the people, businesses, and the economy and right now we are failing on all three fronts," Harvard Law School Prof. Elizabeth Warren told consumer columnist Laura Rowley last week. "Financial products don't have to be idiot-proof, but they should not be deliberately designed to fool people or make risk-evaluation difficult. People are losing value on their homes who never took out a subprime mortgage; people are losing jobs who never carried a dollar of debt on a credit card."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com