So should we heed his advice?
The Charlotte Observer recently interviewed Wells Fargo CEO John Stumpf on his views regarding the sacking of 548 employees of his company’s office in the city. At the middle of the conversation, Stumpf was asked if there is a place of subprime loans in his company. He commented, “We think there is a place for that. The subprime loans that we made – there’s about $25 billion on our balance sheet – were made in a subsidiary company called Wells Fargo Financial. This is a very different kind of subprime loan. It’s a debt consolidation product: The customer already owns her home, but she might have a lot of credit card debt, a debt on an auto, a debt with a hospital. We would consolidate all that debt and put it on her house. That’s the kind of subprime loans we put on the books. In fact, those loans are performing very, very well – well above the industry average because they are fully underwritten, there’s no broker involved, full appraisals, full income verification. In some cases, we originated some subprime that we did not keep on our balance sheet. If you look at the league tables, we are now the No. 1 mortgage originator company, but we have historically been No. 1 or 2. Our origination of subprime would be 8 or 9 or 10. We’re well down the line and that relates more to the $25 billion we hold in this debt consolidation product. We are not big in that business and have never been big in that business.”
We’re surprised at how one man who has become influential in the mortgage industry can still say something so positive about subprime loans after all the hullaballoo. It’s not an excuse that he’s shaping up his bank’s image after acquiring Wachovia that’s why he can release such statements. Stumpf must realize that the property market isn’t on a smart rebound yet.
Among the points that we have to raise include the following:
First, Stumpf puts too much credit in his consolidated-debt subprime loan. We hope no sensible American would take advantage of the package that Wells Fargo is offering, at least until general market conditions stabilize. The more credit card debt and medical loans that you lump to your house, the higher risk that you’re going to take. It’s not going to make your situation easier, it’ll just raise your chances of ending up in foreclosure. Settle you obligations for each loan before giving in to the bank’s much promoted package.
Second, according to the Center for Responsible Lending (CLR), an estimated 2 million subprime mortgage holders are delinquent. In their August 2008 research, CLR concludes, “We now project that almost 2.2 million subprime foreclosures will occur primarily in late 2008 through the end of 2009, up from our original 1.1 million estimate made in 2006. Additionally we estimate that 40.6 million homes in neighborhoods surrounding those foreclosures will suffer price declines averaging over $8,667 per home and resulting in a $352 billion total decline in property values.” Now, isn’t this more convincing than Stumpf’s promotion?
There’s a better time for acquiring a subprime loan. This year (and the year after) won’t be all that good for this type of loan.