According to a report by Reuters, Wells Fargo is looking to re-enter the subprime mortgage market by lowering its standards of acceptable credit scores for borrowers. Wells Fargo is the largest U.S. mortgage lender, and a move back into subprime mortgages may signal a sizable shift in the mortgage lending environment.
Wells Fargo is interested in customers with credit scores as low as 600, notes the report. Its prior limit was 640, often regarded as the limit between mortgages that are considered prime and subprime. Credit scores range from 300 to 850.
Other large banks, however, seem reticent to follow Wells Fargo’s lead, remaining cautious about any return to the subprime market. Lenders are wary of subprime mortgages, due in large part to the passage of the 2010 Dodd-Frank Law. If mortgage borrowers don’t meet the law’s eight criteria to qualify for a mortgage and later default on a loan, a borrower can sue the lender and argue the loan should have never been made.
Lenders venturing back into the high-risk loans market are even using a subtle marketing trick to assuage fear and spur demand—subprime loans become “another chance mortgages” or “alternative mortgages,” shedding the stigmatized “subprime” label.
Incentivized by rising mortgage rates, lenders have plenty of reasons to target borrowers with lower credit scores. Rising rates are expected to reduce U.S. lending by 36 percent in 2014, according to the Mortgage Bankers Associations (MBA) forecast, due to a large drop in refinancings.
Wells Fargo is looking to lend to borrowers with weaker credit, but only under the condition the mortgages can be guaranteed by the Federal Housing Administration (FHA). Since the loans would be backed by the government, Wells Fargo can package them to sell to investors as bonds.
Subprime mortgages were at the center of the financial crisis, but many lenders believe that with proper controls the risky business ventures can be properly contained and generate profit.