California-based real estate attorney Christopher Hanson says that what Wells is doing smells of discriminatory practice. After all, we all know what kind of shape the condo market is in.
The bank, however, is blaming its behavior on an interpretation of 2008 Fannie Mae guidelines. The guidelines prohibit lenders from selling loans to Fannie if the condo's Home Owner's Association insurance is issued by a carrier that covers multiple unaffiliated condo associations or projects.
"FNMA has told us not to accept (insurance) policies like this one," Wells-Fargo representative Shane Copper-Wilson told Hanson. "The current direction from agency and credit policy is that they are unacceptable."
Bear with me, this is insurance and thus insanely complex. There are different ways condominium and home owner associations shop for property insurance. Let's say a condo association buys insurance on the building but buys into a pool with other condos for better pricing. This is called "pooled risk" -- there is one deductible, one limit. So a storm hits the area and wipes out two of the seven buildings in the pool. Only one building is allowed to claim the deductible and file for the loss; the second unit will not be rebuilt with insurance funds. So the mortgage holder on the second destroyed building gets stuck with damaged property, or no property at all.
I can see why lenders may not be hot to trot on pooled policies.
But there is another, more preferable type of insurance, says Hanson, called "affiliated coverage". With affiliated policies, those seven units would group together to form a risk purchasing group to get a better price on the coverage, but each building would have it's own separate policy. Building A is wiped out, it's covered; building B, covered, and on down the line.
So what's the problem here?
A Wells Fargo spokesperson in Dallas says that if the insurance policy meets FHA and Fannie Mae standards, the bank will make the loan. Wells, says Tom Goyda, is one of the largest condo financers in the industry today.
But attorney Hanson says they won't be for long with this policy. One of his qualified clients tried to buy a Bay-area condominium, but Wells Fargo rejected the loan. Why? They invoked the "cannot be re-purchased by FNMA on the secondary market because of the insurance" rule. And as for Wells' argument that FNMA wrote the rules, which they are just obeying, Hanson says hogwash. Wells is reading FNMA's two year old Selling Guide too restrictively.
"If the Wells interpretation was correct," says Hanson, "then every home owner's association in the country, be it a single family development or a condominium association, would each have to be insured by different carriers."
Bottom line: Hanson thinks Wells is trying to get out of the condo market because of the real estate meltdown. But here's the rub: Wells is not getting out of the insurance business. The company continues to sell condominium insurance policies through a subsidiary, even though the condos they insure are ineligible for Wells Fargo loans.
Maybe, muses Hanson, there's more money to be made in selling insurance policies than in making condo loans.