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Lending

No Reuters, this is not a return to subprime risk

Loosening credit standards is not a prelude to Global Meltdown 2.0

February 14, 2014
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Mortgage originations are hurting – rising interest rates and heightened regulations are taking a big bite out of originations.

The Mortgage Bankers Association last month already lowered its forecast for 2014 mortgage originations by $57 billion to $1.12 trillion. The group lowered first-half expectations for both purchase and refinance loans.

Purchase originations are expected to reach a revised $677 billion for 2014, compared to the $711-billion figure previously forecasted. Compared to 2013, purchase originations are expected to increase by 3.8%. 

So now lenders are looking at ways to deal with the challenge, and one, Wells Fargo (WFC) is loosening its credit standards.

To Reuters, though, this cautious step is the bank “tiptoeing back into subprime home loans again.”

The problem? It’s just not true. At least from the this-is-a-crisis coverage perspective. Historically, subprime is anything below a 640 FICO. But the definition of subprime, as the way Reuters implies, is "overly-risky."

From Reuters:

Wells Fargo & Co, the largest U.S. mortgage lender, is tiptoeing back into subprime home loans again.

The bank is looking for opportunities to stem its revenue decline as overall mortgage lending volume plunges. It believes it has worked through enough of its crisis-era mortgage problems, particularly with U.S. home loan agencies, to be comfortable extending credit to some borrowers with higher credit risks.

OK, but that’s not unexpected. Nor is it news.

The small steps from Wells Fargo could amount to a big change for the mortgage market. 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.

How do journalists count? One, two, trend. Only here they are sounding the alarm about one, not just one, two. That’s a real fast leap to trend

Any loosening of credit standards could boost housing demand from borrowers who have been forced to sit out the recovery in home prices in the past couple of years, but could also stoke fears that U.S. lenders will make the same mistakes that had triggered the crisis.

So far few other big banks seem poised to follow Wells Fargo's lead, but some smaller companies outside the banking system, such as Citadel Servicing Corp, are already ramping up their subprime lending. To avoid the taint associated with the word "subprime," lenders are calling their loans "another chance mortgages" or "alternative mortgage programs."

That’s just it. These aren’t subprimes. Calling a camel a moose doesn’t make it any less a camel.

And lenders say they are much stricter about the loans than before the crisis, when lending standards were so lax that many borrowers did not have to provide any proof of income. Borrowers must often make high down payments and provide detailed information about income, work histories and bill payments.

Exactly. It’s ridiculous to call these subprimes as if they are NINJA mortgages, given the new skin-in-the-game standards.

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.

It is looking at customers with credit scores as low as 600. Its prior limit was 640, which is often seen as the cutoff point between prime and subprime borrowers. U.S. credit scores range from 300 to 850.

And that’s the point. 600 is not subprime, especially with all the criteria they are including, and all the documentation required today. These aren’t cov-light.

But more importantly, just lending to people with less than stellar credit is not what caused the financial crisis. It was lending without any real underwriting, followed by the bundling of these subprimes and selling them as triple AAA that was the real catalyst. Once the housing bubble started to burst around 2007 the values of those securities tied to real estate pricing dropped like a rock, the financial crisis was off and running.

Maybe it’s just that memories are short and people are over cautious, but let’s not call this something that it’s not.

Yes Wells Fargo undertakes greater risk in lending to those with less than perfect credit, but every risky undertaking isn’t the next step to Crash 2.0, even if it seems like every week another reporter is declaring that X is the next trigger for Crash 2.0.

Risk is where the reward lay. It's a new day, with new rules. The game, Reuters, has changed for good and for the good.

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