Who better to tell us how to “get housing right” than the head of Wells Fargo Home Loans! Surely Mike Heid would have no conflicts of interest and would solely have the benefit of the homeowner in mind.
• In the short-term, I believe it is critical to end uncertainty about rights and responsibilities between market participants. Simultaneously, we need to work hard to find long-term bipartisan solutions to restructure the housing finance system in America.
• Washington did the right thing in setting up HARP – a national program that ensures all servicers know the rules in refinancing underwater loans. We need to give this program – and others – time to work. I would urge caution when considering whether additional housing programs are necessary at this time.
• Finally – and perhaps most importantly – regulators need to strike the appropriate balance between risk management on the one hand and giving more consumers a better chance to get loans on the other.
Let’s translate this, shall we:
• Let’s not obsess over who owns what and who forged and falsified what loan documents. We’re friends, right?
• The HARP program where we can trap borrowers into higher interest rates and make lots of money in closing costs works great for us! Don’t get crazy with principal reduction or eminent domain or HOLC-type plans. We’re good.
• You don’t want homeowners not to be able to access our fine products, do you? No? Then leave us alone.
That about covers it.
Heid casually mentions that he and some of his other servicer pals recently strolled over to the White House to brief executive staff, HUD and Treasury officials on housing policy. The door is still open for these people after they had to sign a $25 billion settlement over their servicing misconduct, which is ongoing, by the way. Heid describes the settlement as industry “working together” with regulators to find a solution, and he’s right. That’s what “accountability” looks like in this era.
Here’s who we’re talking about when we talk about Wells Fargo:
The bank that put together the unusual security did well. The customers who bought it suffered large losses. No one — at least no one who traded the security — seems to have understood the risks that were hidden deep in the prospectus.
The security in question was extraordinarily complex in its name and its details, but simple in its selling points. It was marketed in $25 units, a popular price point for debtlike securities sold to individual investors, and it promised monthly interest payments for as long as 30 years, at which point the investor would get the $25 back. Those interest payments would fluctuate with interest rates on Treasury bills, but could not go below 3 percent a year or above 8 percent.
Wells Fargo, the bank behind the security, now says that anyone who had read the prospectus should have understood that disaster was looming in June, when news related to the security was disclosed. But that disclosure — I’ll get to the details in a minute — had the opposite effect on the market. In New York Stock Exchange trading, the price leapt higher, on heavy volume, and stayed there for weeks.
The price per share was $24.88 on July 12, when trading was halted as investors learned they would get just $14.69 a share. Trading never resumed.
The difference between market expectations and realities boiled down to one fact: Wells Fargo concluded it was entitled to a payment of $10.69 a share to compensate it for the profits it would have made over the next 23 years had the security not been redeemed.
This “I always win, even when I lose” mentality is endemic to the financial industry at this point, and Wells Fargo is no different. Their implicit guarantee in the form of too big to fail ensures that they will forever privatize the profits and socialize the losses. And we’re supposed to listen to their executives about wise and responsible housing policy?