FREER REIN, OR EXTRA ROPE? "You may have a loan that doesn't meet [agency] guidelines, but you would make that loan every day," said Brad Blackwell, in explaining why Wells Fargo likes the flexibility that comes with making mortgages to be held on balance sheet rather than sold to Fannie or Freddie.
FREER REIN, OR EXTRA ROPE? "You may have a loan that doesn't meet [agency] guidelines, but you would make that loan every day," said Brad Blackwell, in explaining why Wells Fargo likes the flexibility that comes with making mortgages to be held on balance sheet rather than sold to Fannie or Freddie.

Brad Blackwell, who heads portfolio lending at Wells Fargo, calls his bank's underwriters the "fighter pilots" of the lending industry — they belong to a force trained to attack very specific targets.

Bull's-eyes in this case are mortgage borrowers with credit criteria that make them good risks in Wells' eyes, even when they don't meet the Fannie Mae and Freddie Mac molds, and produce loans worth keeping.

Bankers like Blackwell say they are motivated to make "high-quality mortgages" because they are holding a lot more of them for the long haul. "If a lender is making a loan on balance sheet, they have 100% skin in the game, so they can ensure the borrower has the ability to repay," Blackwell said.

Wells' portfolio of on-balance-sheet mortgages rose 42% in the past three years to $210.3 billion at March 31. This shift is going on at other banks as well as they become comfortable with loans that have high credit scores, low loan-to-value ratios and few defaults.

These are the reasons many lenders argue that all loans held on banks' balance sheets should get the ultrasafe "qualified mortgage" stamp of approval from the Consumer Financial Protection Bureau, a controversial proposal currently before Congress.

Blackwell, who spent 17 years early in his career at the former World Savings Bank, was tapped in 2012 by Mike Heid, the president of Wells Fargo Home Loans, to create a portfolio lending unit. Jumbo loans to the wealthy are a big portion of the portfolio but far from all of it. The San Francisco bank is now keeping all high-balance conforming loans — those between $417,000 and $625,500 — on its own balance sheet. Such loans would have been sold to Freddie Mac or Fannie Mae before 2012.

Blackwell discussed how Wells underwrites nonconforming and non-QM loans, why some borrowers have been shut out of the mortgage market and the perks Wells offers jumbo borrowers.

Why do you prefer keeping loans on balance sheet?

BRAD BLACKWELL: When you originate a loan to be held in portfolio, you get to make your own rules. You get to decide, "Do I like this loan, or don't I?" You can exercise a degree of judgment on risk.

When I originate to investor guidelines, I create policies that satisfy those guidelines, so judgment is less important.

You might have a loan that meets every guideline that Fannie or Freddie would have or a private investor would have — but you may not make that loan yourself. On the other side of that same coin, you may have a loan that doesn't meet the guidelines, but you would make that loan every day.

What are the parameters you've set for underwriters?

We have a strong emphasis on the fundamentals of lending: the borrower's ability to repay, credit history, commitment to the transaction, which is skin in the game and the quality of the collateral.

This is going back to the fundamentals of lending. This type of lending hasn't really been done since the mid-1990s. As soon as automated underwriting engines were created, you started to lose that capability in the nation's mortgage lending competency level. We need to sharpen the [underwriters'] experience in these areas.

We want to do high quality lending for our portfolio, and rules-based underwriting might not bring in quality.

Jumbo borrowers often have very complex financials. I internally call these underwriters the fighter pilots of the underwriting industry. It gives us a tremendous amount of flexibility to meet the needs of our customers.

We still have guidelines and quality-control discipline, but it's all aimed at judgment.

How do you actually underwrite non-QM loans?

We look at lots and lots and lots and lots of loans together. We're very disciplined at doing what we call deal reviews on nonconforming loans, and in teams looking at transactions together. We have 400 underwriters in six separate locations — too many locations, and you lose quality control.

We say, if you were to change this one feature — say, the borrower has more cash, income or savings — then we run through various scenarios so we get everybody used to thinking about how to approve loans and what loans we want or not.

Why should loans held on a bank's balance sheet be exempt from the CFPB's qualified-mortgage rule?

It makes sense because the intent of Congress in creating QM was to ensure lenders are making decisions that are smart. If a lender is making a loan on balance sheet, they have 100% skin in the game, so they can ensure the borrower had the ability to repay.

Are lots of qualified borrowers not getting home loans?

There are so many people that know they're qualified and the rules may not allow them to get a loan today.

We're able to do things with our portfolio that other lenders can't do.

Because we're very confident, and have such strong controls and can originate very high-quality loans, we are originating both QM and non-QM loans if they make sense.

We're comfortable doing non-QM lending [even though] you expose yourself on ability-to-repay lawsuits in the future. We are very disciplined that the loans we're making are to customers that are very highly qualified; they just can't meet the test of 43% debt to income [or others tests in the CFPB's] Appendix Q, or are interest-only loans.

We don't have a cap on non-QM; we want to make them QM when possible but there are many customers that are complex. The rules of Appendix Q do not make sense for all the customers.

Is it a tough balancing act?

Legislating underwriting is very challenging. The concern lies at the margin. Either I make the rules too tight, and there are always exceptions to the rule. If I want nothing but high quality I have to make them too tight, but if I loosen them I might bring in customers I don't want. Finding that line with rules [is hard] when every customer is different. That has been the challenge for the industry with the QM rule.

To what degree can you customize products?

I can do a non-QM borrower, a 10%-down borrower and condos that Fannie and Freddie haven't approved.

We rolled out an 89.9% loan-to-value program with no mortgage insurance in mid-2014 to meet a specific need for first-time homebuyers in high-end markets or move-up buyers who didn't have appreciation.

And we do mixed-use condos, with retail down and residential up, that Fannie and Freddie would not approve.

Pricing on jumbo loans is still lower than conforming?

A jumbo borrower will get a slightly better price today than a conforming loan borrower. Banks' cost of funds is still low, and the agencies have added quite a bit in guarantee fees and other costs. Wells is not the low-priced leader. We are mid-market price. We believe providing a fair price with lots of value.

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