Wells Fargo is turning once again to subprime loans as a strategy to boost declining revenue as overall mortgage lending volume drops, reports Reuters.
The reentrance into subprime lending comes after Wells Fargo—the nation’s largest mortgage lender—worked through issues associated with risky lending that contributed to the housing crisis. The move could have major implications, according to the article.
“The small steps from Wells Fargo could amount to a big change for the mortgage market,” says Reuters. “After the subprime mortgage bust brought the banking system to the brink of collapse in the financial crisis, banks have shied away from making home loans to anyone but the safest of consumers.”
Credit standards tightened following the housing market crash, forcing many would-be homebuyers onto the sidelines throughout the recovery. And while loosening those standards could provide a boost to housing demand, some fear it could lead to the same mistakes that caused the crash in the first place, says Reuters.
“Subprime mortgages were at the center of the financial crisis, but many lenders believe that done with proper controls, the risks can be managed and the business can generate big profits,” the article says.
This time around, lenders say they have stricter requirements compared to loans made leading up to the crisis, when lending standards had relaxed so much that many borrowers didn’t have to provide proof of income.
“Borrowers must often make high down payments and provide detailed information about income, work histories and bill payments,” says Reuters. “Wells Fargo in recent weeks started targeting customers that can meet strict criteria, including demonstrating their ability to repay the loan and having a documented and reasonable explanation for why their credit scores are subprime.”
However, the bank is now open to lending to customers with credit scores as low as 600, down from a prior limit of 640.
Wells Fargo’s lending spigots still aren’t on full blast, Reuters notes: while the bank is willing to lend to borrowers with weaker credit, it’s still targeting mortgages that can be guaranteed by the Federal Housing Administration. This strategy differs from other, smaller lenders who have already been active in the subprime market, branding loans as “another chance mortgages” or “alternative mortgage programs.”
“Because the loans are backed by the government, Wells Fargo can package them into bonds and sell them to investors,” the article says. “The funding of the loans is a key difference between Wells Fargo and other lenders: the big bank is packaging them into bonds and selling them to investors, but many of the smaller, nonbank lenders are making mortgages known as “nonqualified loans” that they are often holding on their books.”
Written by Alyssa Gerace