Wells Fargo - A Bit of Sunshine?

U.S. banking regulators are discussing new rules that would require banks that originate home loans to require larger down payments before they may fully "securitize" the balance.  They aim to make sure lenders, asset-backed security investors and borrowers all have skin in the game.

In other words, if lenders make subprime loans (that require little down payment), they have to suck up some of the credit risk of the borrowers, rather than passing it all on to someone else through derivatives.  As we have all learned to our great regret, those other investors remained ignorant of that credit risk -- whether because they relied on bogus credit agency ratings or because they just rode the real estate asset bubble like everyone else.

The rest is demand and supply: lots of investors wanting home loan securities drive up the price.  Which causes lenders to make more and more of them.  More and more subprime loans.  Which, of course, drive up real estate prices.

Unsurprisingly, most banks are fighting this proposed regulation kicking and screaming.  Some even have the gall to assure us that the financial crisis "self-correction" already caused lenders to fix their lending and securitization practices.

But one bank stands out:

The notable exception has been Wells Fargo, which has pushed for even tighter underwriting standards than the regulators seem to favour. In a recent letter to regulators, Wells Fargo argued that borrowers should be required to make down payments of at least 30 per cent before banks are allowed to fully sell the loans to investors.

“The point we are making, unlike others, is that risk retention is a good idea,” John Gibbons, an executive vice-president with Wells Fargo Home Mortgage, told the Financial Times. “Rather than being something rare or unusual, it should be common in the mortgage industry to align the interests of lenders, borrowers and investors.”