Financial crisis fears rise while Wells Fargo eases way back into subprime home loans
Wells Fargo & Co is now making its way back to the subprime mortgage market, potentially bringing fears that US lenders will be making the same mistakes that prompted the financial crisis, Reuters reported.
The biggest mortgage lender in the US is now seeking for ways to stop the fall of its revenue with the drop of total mortgage lending volume. It thinks that it has already solved enough of its problems during the financial crisis to be comfortable in giving credit to high-risk borrowers, the report said.
The small measures taken by Wells Fargo could mean a large change for the mortgage market. Banks have confined their home loans to the most qualified borrowers after the subprime mortgage bust in the financial crisis nearly caused the breakdown of the banking system. While any move to relax credit standards could bolster the demand for housing from potential borrowers, it could also bring back fears that US banks will commit the same errors that led to the crisis, the report said.
Not a lot of big lenders are keen on following the move of Wells Fargo. However, smaller firms operating outside the banking system are already bolstering their subprime lending offers. However, they are trying to remove the stigma of subprime loans by renaming their loans as "another chance mortgages" or "alternative mortgage programs," the report said.
Compared to their pre-crisis practices marked with standards so relaxed to the point that a lot of borrowers were not required to give proof of income, lenders say they are more stringent now. Today, borrowers often need to give high down payments and give specific data regarding their income, employment history and bill payments, the report said.
In the past few weeks, Wells Fargo has been offering its product to those who can comply with their criteria which includes showing their ability to pay back the loan and providing a documented explanation for the reason behind their subprime credit scores, the report said.