Wells Fargo has purchased $14 billion of delinquent government-backed mortgages this month, leading the pack among servicers beginning to feel the balance-sheet pinch of the coronavirus pandemic.
The banking giant was among companies that purchased roughly $20 billion in loans total from investors that were over 90 days past due, according to data from Ginnie Mae investment pools.
The jump in buybacks — required for servicers of delinquent Ginnie-backed loans — is one of the first real signs of how the pandemic is hitting banks' loan books. While cash-strapped mortgage borrowers have been able to benefit from government-sanctioned forbearance plans, Ginnie rules do not distinguish between such plans and missed payments. Servicers must still advance principal and interest to investors.
Analysts speculated that Wells was likely proactive in offering forbearance plans to distressed borrowers when the pandemic hit in March, at a time when regulators were urging banks to help borrowers who had lost their jobs or were furloughed.
“Wells erred on the side of caution and put more people into forbearance programs in April than other servicers, on average,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “When the loans become delinquent, it’s cheaper for Wells to buy the loans than to advance principal and interest and pay a 4% coupon to investors when their cost of funds is lower.”
U.S. Bank purchased the second-highest total of delinquent loans from Ginnie investors, $3.1 billion, followed by Carrington Mortgage Services, a nonbank California lender and servicer, which purchased $800 million in delinquent loans from Ginnie.
Tom Goyda, a Wells spokesman, confirmed the bank's $14 billion buyback amount. He said that under accounting rules, loans in Ginnie Mae pools must be consolidated on a bank’s balance sheet once the loan is more than 90 days past due, regardless of the circumstances.
"In the normal course of business, Wells Fargo regularly purchases government-insured ... loans that are more than 90 days past due out of Ginnie Mae pools to manage balance sheet impacts and reduce expenses," said Goyda. "In June and July, the number of loans we purchased out of Ginnie Mae pools increased substantially due primarily to loans in COVID-related forbearances."
Other banks that made large purchases of loans that were 90 days past due include Truist Financial, formerly BB&T Bank, with $772 million in purchases; JPMorgan Chase, with $545 million; and MidFirst Bank in Oklahoma City, with $341 million in purchases.
Some analysts suggest that the buyouts are not representative of delinquencies in the long run because many borrowers who asked for forbearance plans in March will ultimately become current on their mortgage even if they failed to make payments in April, May and June. Congressional relief allows borrowers to defer mortgage payments for up to a year and extend a loan's terms to avoid foreclosure.
Wells is the third-largest servicer of loans backed by the Federal Housing Administration, the Department of Veterans Affairs and the U.S. Department of Agriculture’s USDA Rural Development loan program. Ginnie Mae oversees the securitization of FHA, VA and USDA loans by ensuring that principal and interest payments are paid to bondholders in a timely fashion.
Wells bought out more than 7% of its entire servicing book, Buchta said.
"It's a big number and some investors got smoked, so it had a significant impact on the market as a whole,” he said. "It was not a happy event for investors. It definitely caused a lot of principal losses for investors in Wells Fargo's securities."
But other observers said Wells' one-time purchase was likely a less costly option for the bank than continuing to recoup missed payments for investors.
“Wells likely was losing a ton of money having the loans sit in Ginnie Mae pools,” said Ted Tozer, a senior fellow at the Milken Institute and former Ginnie president. “This is a hangover of delinquencies.”
At the end of every month, Ginnie releases loan-level data from mortgage servicers that shows recent activity and how many loans are delinquent. The data provides information to investors in mortgage-backed securities about loans that have paid off or are 30, 60 or 90 days delinquent.
Roughly 4.2 million homeowners are in forbearance plans, according to the Mortgage Bankers Association. About 12% of Ginnie loans were in forbearance on July 8, compared with roughly 6% of Fannie Mae- and Freddie Mac-backed loans.
Only 15% of banks and credit unions currently originate FHA loans. Many banks pulled out of the FHA program after the financial crisis in 2008 because of the risks of being sued by the government for False Claims Act violations. Under the Trump administration, the FHA has been
Some mortgage experts think delinquencies resulting from the coronavirus crisis are short-lived, noting that homeowners entered forbearance in part because Congress gave them the green light under the Coronavirus Aid, Relief, and Economic Security Act.
“These were all performing loans before the pandemic and the borrowers opted into forbearance because of the CARES Act,” said Rick Sharga, president and CEO of CJ Patrick Company, a real estate consulting firm. “These were not nonperforming loans beforehand. A large number will go back to making payments or will get reinstated and a small number will get loan mods or an extended forbearance.”
