Wells Public Again on GSE Fault - Too Risk-Averse

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It is rare for a home lender to publicly criticize Fannie Mae and Freddie Mac. Because of their market clout, their loan sellers usually leave it to ad hoc lobbying coalitions to voice complaints.

But as the top originator and servicer, Wells Fargo & Co. has plenty of market power, too. And the accounting improprieties at Freddie that surfaced last year, combined with an administration increasingly unsympathetic to the two government-sponsored enterprises, have made them seem politically vulnerable.

That perceived vulnerability may explain why a senior Wells executive jumped into the public policy debate this week by making public a letter to a congressman that aired business grievances usually reserved for the negotiating table.

In his March 2 letter to Rep. Barney Frank, D-Mass., Mark Oman, Wells' group executive vice president for home and consumer finance, accused Fannie and Freddie of hampering "the efforts of Wells Fargo and all of the nation's mortgage lenders to reach underserved market segments."

How have they hampered those efforts? According to Mr. Oman, by being too risk-averse and charging guarantee fees that he said were "excessive" and bore "little correlation to risk."

Thursday, Fannie issued a terse statement in which it called Mr. Oman's letter "riddled with factual and analytical inaccuracies."

In the letter, which Wells says was sent at the request of Rep. Frank, Mr. Oman charges that the GSEs' stringent policies on manufactured home loans and other types of loans to low- and middle-income homebuyers are discouraging the financing of affordable housing. He wrote that Fannie and Freddie insist that Wells retain some of the risk on the "emerging markets" products it sells to them and that they require Wells to pay higher guarantee fees on these loans. He said these requirements had the effect of keeping thousands of consumers out of homes.

Mr. Oman blasted the GSEs' reluctance to "allow for a layering of risk factors." For instance, they might buy loans with smaller down payments but not without recourse to the lender, a higher guarantee fee, or both.

Through experience, he said, Wells and other lenders have found that "effectively serving the affordable-housing segment frequently requires just this kind of risk layering."

Michael McMahon, an analyst in San Francisco with Sandler O'Neill & Partners LP, took issue with Wells' demand that Fannie and Freddie take on more risk. He noted that the GSEs have often been accused of taking on too much risk with too much leverage.

"I think it's only appropriate for Fannie and Freddie to require their partners to share an appropriate amount of risk," Mr. McMahon said.

He interpreted the Wells letter as political grandstanding for business concessions.

"The GSEs are vulnerable right now" because of Freddie's scandal and renewed interest in Washington to regulate the two companies more stringently, he said.

In an interview Thursday, Pete Wissinger, the chief executive of Wells Fargo Home Mortgage, insisted that Wells' motivation was public policy, not business.

He said that Wells decided to complain publicly because it wants to draw the industry's attention. Among its recommendations: a single GSE regulator for safety-and-soundness and mission compliance.

"Barney Frank asked us for our view and we made it public because we didn't want to do it privately," Mr. Wissinger said.

He said he hoped that the letter would prompt other lenders to join the fray.

"I encourage all lenders to give input on how these markets can be served more effectively," Mr. Wissinger said. "The entire industry should enter the debate and give feedback on how we should do this better."

Wells has not been shy about using the public spotlight to disparage the GSEs.

Three years ago, CEO Richard Kovacevich complained in The Wall Street Journal that Fannie and Freddie were threatening reprisals against Wells for its participation in a lobbying group that sought to limit Fannie's and Freddie's power.

In criticizing Mr. Oman's letter, Fannie also questioned Wells' commitment to affordable housing by referring to Wells' image problem over predatory lending. Since last year the Association of Community Organizations for Reform Now has been attacking the lender for abusive practices.

"Especially given their record regarding predatory lending practices, we are surprised that Wells Fargo wants to have this debate," Fannie said.

(In his letter, Mr. Oman said that last month Wells changed its home lending practices "to better meet the credit needs of traditionally underserved communities.")

Freddie would not discuss Mr. Oman's letter. National Mortgage News first reported the letter on its Web site Wednesday.

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