Remember in 2004 when you could get a mortgage loan with average credit, no income, and no assets? Many mortgage lenders can remember approving loans where the borrower had a 520 FICO score. The subprime market was hot in the early 2000’s and helped to fuel the housing boom as more people could purchase a home than ever before. Cash out refinances were available for most borrowers, regardless of their credit score. As a result, the subprime loan market was blamed for partially causing the housing bubble to burst. Now, subprime mortgages are coming back only this time they are called “another chance mortgages”.
Wells Fargo is dipping its toes into the subprime market as it looks to increase revenue. Overall mortgage lending is expected to go down by 36% in 2014 as mortgage interest rates rise. In order to combat this Wells Fargo and other lenders will need to look at alternative revenue streams and working with loan starved borrowers may be the solution. Many of these borrowers have the ability to pay for a mortgage loan but the economic downturn has tanked their credit score as they went through, and recovered from, financial challenges.
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Wells Fargo has lowered their minimum credit score requirements on some of their loan products to 600. In order to qualify borrowers have to demonstrate their ability to repay the loan and show why they have a poor credit score.
Subprime Mortgages Fueled the Housing Boom
According to Mark Fleming of CoreLogic, in 2004 subprime borrowers were 29% of the issued mortgage loans. In 2013, they were 0.3%. From a numbers perspective in 2013 $3 billion in subprime mortgages were issued where in 2005, the number was $625 billion. Moody’s Analytics has stated that a housing recovery cannot take place unless access to mortgage credit loosens up so that first time home buyers can enter the market.
Citadel Servicing Corp. has already ramped up their subprime lending and will lend to borrowers with credit scores as low as 490. Companies like Citadel are paving the way for subprime mortgages to make a comeback by offering high interest rate, high down payment home loans. How these loans perform will be watched by financial analysts and industry experts.
Part of the challenge with offering subprime mortgages is that most lenders have to hold the loan in house and cannot sell it on the secondary market. When a loan is held in house, they cannot go and issue another loan to someone else without having more capital to do so. When a loan is sold, it frees up the mortgage lenders capital to issue another loan. In order for the subprime market to make a big comeback mortgage bankers have to be able to bundle and sell the loans. Citadel Servicing Corp. is planning on doing just that. Time will tell what the market appetite is for it.
As for Wells Fargo, they are a giant in the mortgage lending space. What they do will be replicated by mortgage lenders throughout the country, so this is likely the beginning of a trend to slowly, but surely, start lending to borrowers with damaged credit.
If you have a low credit score there are mortgage loan programs available for you right now. Call your mortgage banker today to learn more.
