Wells Fargo cuts out some first-time buyers

Lender eliminates no-credit borrowers from FHA program

By ZACH FOX - Staff Writer | Friday, April 4, 2008 8:53 PM PDT ∞

Wells Fargo instituted a new policy this week that ignores federal guidelines on some loans intended for first-time home buyers in favor of more stringent qualification standards.

The bank has decided that some of their Federal Housing Administration products will no longer allow borrowers without credit histories, a move that some housing advocacy groups say disproportionately affects the immigrant community and will deepen the region's housing recession.

Wells Fargo's new policy requires an established credit history for all its wholesale-issued FHA loans made after March 31, according to a copy of its March 24 wholesale guidelines provided to the North County Times by a mortgage broker on condition of anonymity because the guidelines are not intended for public distribution.

Wells Fargo, a major lender with $575 billion in a wide range of assets, declined to comment other than releasing a written statement saying the guidelines apply only to its wholesale division, where it offers loans through mortgage brokers.

Regarding whether the practice applies to bank-issued loans, Wells Fargo wrote that it does not discuss its credit policy guidelines.

The move to prevent certain borrowers from securing FHA loans runs counter to a recent governmental attempt to widen FHA availability by increasing the limits for maximum loan amounts in high-cost areas. In San Diego, the limit was increased to $697,500 from $362,790.

FHA's handbook explicitly states that borrowers without credit histories should not be denied FHA loans: "Neither the lack of credit history nor the borrower's decision not to use credit may be used as a basis for rejecting the loan application."

FHA does allow lenders to apply tougher qualification standards if based on business decisions, said Lemar Wooley, a spokesman for Housing and Urban Development, which oversees the FHA.

If a move to disallow borrowers without credit histories becomes common practice, some of San Diego's large immigrant population could struggle to buy homes, brokers said.

Wells Fargo's change of policy represents just one of several moves by lenders to toughen lending criteria.

"The loan standards are dramatically different, and it all adds up to a problem because we're not getting enough buyers into the market," said Edward Leamer, an economist and director of UCLA Anderson Forecast. "If you only deal with cash because you have the means to do so, you shouldn't be punished for that."

Some housing advocacy groups said the move will hurt immigrants more because they tend to avoid credit cards.

"In my opinion, that's a prejudicial hit on a cultural practice," said Yamila Ayad, president of a San Marcos mortgage firm. "A lot of minorities who come into this country, who are working effectively, who are residents, who are citizens ---- they don't believe in credit. It's a cash society. ... They're saying, 'If you're not like us, we're not going to lend to you.'"

Many immigrants ---- not just Latinos ---- are wary of establishing credit because they come from countries where many banks and credit services are predatory, said Gabe del Rio, vice president of lending at Community HousingWorks, a nonprofit housing advocacy group.

By not trusting credit cards, some immigrants have no credit history whatsoever. While that precludes them from qualifying for many loans, the FHA has created a system that establishes "nontraditional credit" by gauging a borrower's timeliness in paying rent or utilities, said Bill Glavin, special assistant to the FHA commissioner.

Plenty of lenders still allow borrowers without credit histories to qualify for FHA loans, said Don Marginson, a Rancho Bernardo mortgage broker.

But if other lenders follow suit, it could delay a housing recovery by restricting buyers.

"That goes completely against everything that we need to have happen," Marginson said.

Created during the Great Depression, FHA aims to help first-time and low-income buyers get into homes by allowing looser guidelines for credit histories and requiring only a 3 percent down payment.

But the agency itself does not issue loans. Rather, it insures them, which encourages lenders to issue mortgages they would not otherwise.

It is up to lenders such as Wells Fargo to determine whether to issue an FHA loan to a certain borrower.

A strain on first-time buyers could worsen the region's depressed housing market. That is because home owners tend to not move up to a bigger house if they cannot sell their lower-priced home to a first-time buyer.

"It's a huge hit for any potential borrowers that could start stimulating this market," said Ayad, the San Marcos mortgage broker. "Whatever hope we had left of reviving the local housing market is being taken away from us."

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com.

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