Wells Fargo plans to give its underwriters more control in approving mortgages that it retains in its own portfolio, as the bank tries to add high-quality assets to its balance sheet.
Wells is touting the new strategy, which it calls "judgment underwriting," as part of an effort to attract borrowers that may not qualify for conventional mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration. Mortgages that the San Francisco bank underwrites using these new guidelines will not be sold to the government-sponsored enterprises; instead, Wells will keep them in its "held for investment" portfolios.
Brad Blackwell, a Wells Fargo executive vice president in the bank's home mortgage unit, said that regulations have caused most banks to shift towards rules-based underwriting, which can be less flexible than more old-fashioned, in-house underwriting processes that allows for variations in individual borrowers' qualifications.
Wells Fargo's new "judgment-based" underwriting is "anathema to what is happening in the mortgage industry today," Blackwell said during a panel discussion at a homeownership conference in April. "The more regulated the mortgage industry gets, the less judgment is allowed to be used."
But he acknowledged that going back to old-fashioned underwriting has its own challenges.
"This is hard to do," Blackwell told American Banker after the discussion. "How do we create consistency in using judgment for our own portfolio?"
Bank spokesman Tom Goyda said Wells is in the early stages of implementing the new strategy, and acknowledged that it will require extensive analysis and underwriter training.
Banks already have the ability to classify loans into different risk buckets. But Blackwell said there are "compensating factors," which he did not identify, that underwriters will be trained and encouraged to look for.
Most lenders currently rely on "some judgment … but it's more rules-based today and we're going to be bringing in more judgment," Blackwell told American Banker. "The way we will be approaching this is much more of a thorough judgment-based approach that deemphasizes all the individual rules and increases the old-fashioned 'I get to know you'" type of rules.
Joe Garrett, a principal at the mortgage banking advisory firm Garrett, McAuley & Co. says banks are having a hard time finding good assets to invest in. Those that are retaining mortgages typically do so on jumbo loans with low loan-to-value ratios, which ensure that the borrowers have enough equity to withstand home price declines.
"Judgment underwriting is what used to be called common sense underwriting," Garrett says.
And some potentially qualified home buyers may be shut out of getting conventional mortgages backed by Fannie Mae or Freddie Mac. For example, banks are eager to lend to investor-owners who buy multiple properties at one time, often putting down large upfront payments —: but those borrowers are only able to get GSE financing for a maximum of ten properties.
"What if you want to put 60% down and your name is Bill Gates and you already have 10 loans?" asked Garrett. "There is room for common sense underwriting if it's done correctly. It can be very effective and it can be safe and sound lending."
Blackwell said that while credit scores are still considered to be the most "reasonable predictor of success," the traditional Fico score "cannot be the sole judge of whether a loan can be approved or not."
Wells held an average balance of $229.7 billion in residential first mortgages at the end of the first quarter, and $84.7 billion in junior liens in the same period.