It always pays to shop around. If more mortgage customers didn’t choose to borrow from the trusted institution that held their savings and checking accounts without question, it seems that these customers could have found lower interest rates, particularly if these borrowers were customers of Wells Fargo. The Federal Reserve is alleging that between 2004 and 2008, Wells Fargo sold mortgages with higher interest rates to customers who should have qualified for lower interest rates and changed information on documents, such as income, to make it appear as if these customers didn’t qualify for better rates.

As a result, the Fed is slapping Wells Fargo on the wrist with an $85 million fine and a directive to compensate up to 10,000 affected customers who may receive as much as $20,000 in restitution.

The Fed says that the Wells Fargo Financial subsidiary encouraged its employees’ unethical practices by having sales quotas. The bank doesn’t need to admit they did anything wrong, but in their marketing message, Wells Fargo says the actions of a select number of employees shouldn’t reflect poorly on the company as a whole. The $85 million amounts to just over 2% of Wells Fargo’s second quarter profit, and the bank had already set money aside to compensate the affected customers. A fine of 2% of a company’s quarterly profit is hardly a penalty.

While a financial institution should not lie about your finances to trap you into an expensive loan, potential borrowers should take a few steps to prevent themselves from a bank that might take advantage of them.

• Know your credit. Get a free credit score, free credit reports from AnnualCreditReport.org, and analyze your credit report. There should be no surprises when you apply for a mortgage, and with this knowledge, you should be able to tell if a mortgage broker is lying to you about your score or your credit history.
• Shop around. Yes, it’s difficult to find the right mortgage. It’s easy to be tempted into walking into the bank where you do business and ask to speak to their mortgage consultant. You should do this, but your shopping shouldn’t stop here. Find other local banks, community banks, and credit unions. Look online.
• Know the market. Be aware of the best mortgage interest rates. While companies often advertise their absolute best rates that only those with perfect credit will receive, this should give you an idea of the rates you should expect and prevent you from accepting a deal where the rate is unreasonable.

The conversation usually turns to determining who is to blame: the uninformed customers who end up paying more than they need to, the bank’s representatives who are viewed as trusted experts rather than salespeople trying to meet quotas, or the bank’s management that sets the policy and the environment. Everyone shares some blame, but as a customer, one can’t control anything other than your own actions and reactions to other people. Put yourself in the best situation as possible by understanding your own financial situation and recognizing that when you deal with any company, they are trying to sell you something and not always looking out for your best interest.

Wells Fargo is the bank where, through a series of acquisitions and mergers, I’ve been keeping most of my non-online deposits and active checking accounts for my entire adult life, but if I thought I had been misled I would have no problem moving my accounts elsewhere. I do not have a mortgage or any type of loan from Wells Fargo.

CNN Money

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Even with a credit score above 800, it’s still possible to be denied for a mortgage. Looking at the mortgage industry as a whole, for a period of time, lenders were too lax, offering mortgages practically regardless of qualifications. The pendulum has swung the other way, and even qualified individuals and families are having a difficult time receiving credit.

A recent story on CNN followed a potential new home owner whose credit score was excellent. Within days of closing, the lender he had been working with denied his mortgage application. He had a strong income from last year the business he owned, but that was preceded by a year of lower self-employment income during which time he was getting his business off the ground. The year before he established his business, he had a higher income from another company. The most likely explanation for declining his mortgage was his income instability. Even though most recently, his income would qualify him for the mortgage, the lender didn’t like pattern the past few years.

The story ends well; the potential borrower found another lender who was willing to extend a mortgage offer.

I used to think there was an equilibrium between interest rates and home prices. On general, interest rates would decrease while home prices increase, and interest rates would increase while home prices decrease. This would mean that, for the most part, the benefit of buying a house in one aspect would be countered by a drawback in the other aspect. Any timing would be good timing. Today, however, home prices are low and mortgage interest rates are low. This would appear to make a better market environment for buying a house, but fewer people seem to be able to take advantage of the situation due to tighter standards.

With my self-employment, I am concerned that I, too, will find it difficult to qualify for a mortgage with great terms. If I wait longer, buying a house with cash might be an appropriate option, and it may be the only option for someone like me, whose only income is generated through a business that is rather risky. I recently signed another one-year lease for my apartment, a great place to live, but I also paid an additional fee for an option to break the lease within the next twelve months, an likely action.

CNN Money (video with commercial, unfortunately)

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