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Wells Fargo is hoping to resume business within the subprime mortgage market by loosening credit requirements. The market overall may shift towards subprime lending as a result of the largest mortgage lender in the U.S. lessening the standards by which they judge the credit scores of borrowers.
Wells Fargo is hoping to resume business within the subprime mortgage market by loosening credit requirements. The market overall may shift towards subprime lending as a result of the U.S.’ largest mortgage lender lessening the standards by which they judge the credit scores of borrowers.
The old credit score limit was 640 and the new limit is as low as 600. The 640 score was already on the line between prime and subprime borrowing.
The lender is trying to condense the revenue loss from the low lending volumes in the market in general. At this point, Wells Fargo is secure in their plan to broaden lending to include those borrowers considered high risk.
Other lenders such as Citadel Servicing Corp. have been trying to remove the negative connotation of the term “subprime” by re-naming them “alternative mortgage programs” or “another chance mortgages.” It is important to note however, that Citadel is taking a different approach by packaging loans into bonds to sell to investors.
Since the financial crisis that nearly caved in the mortgage market, banks have been wary of giving home loans to anyone that has any sort of risk attached to their loan request. The drop in credit standards will inevitably increase the demand for housing due to increased potential borrowers being able to receive loans. While that may be good news for the housing market, lenders are concerned that the looser standards will lead to another crisis or collapse.
To quell fears of another breakdown in the housing market, lenders like Wells Fargo are imposing stringent rules regarding the loans. Before, proof of income was not necessary for borrowers to disclose. Now, borrowers must not only include their income and work history, but offer facts about bill payments. High down payments are another requirement for these subprime loans.
Wells Fargo has undertaken the task of targeting the potential borrowers these loans would go to in order to figure out the reasons behind their subprime status.
First, they have had to clear disputes with Fannie Mae and Freddie Mac over who was responsible for the losses caused by the mortgage crisis. This has been a theme in the financial crisis as neither the banks nor government mortgage agencies want to claim the responsibility and burden. One issue has been left over and that is a lawsuit with the Federal Housing Administration. Wells Fargo will only lend to borrowers whose mortgages can be assured by the FHA.
“As things become clearer and we are more comfortable with our own processes and controls, it gets easier” to extend more credit, Franklin Codel, Wells Fargo’s head of mortgage production, said.
Owing the reduced mortgage lending in 2014 to growing mortgage rates has created motivation for lenders to become slightly more lax in their view of credit scores. The 36 percent drop will not aid U.S. lenders in the recovery. Therefore, reports have been released that state first-time homebuyers should be the focus of lenders. As long as the risks can be minimized and controlled, subprime mortgages could boost the economy in 2014. Wells Fargo is taking a chance with the subprime lending opportunity to generate profit safely.