It was only seven years ago that WachoviaCorp. began taking on water from cracks in its massive portfolio of subprime loans, eventually leading to a near-collapse amid a crisis on Wall Street.
Now Wells is returning to the scene of that calamity by making a limited number of subprime loans to marginal borrowers, Reuters reports.
While subprime mortgages is seen as a dirty word in banking, Wells and others are returning to the market under different circumstances.
Foremost, Reuters says, Wells is making the loans to borrowers with sub-640 credit scores (the subprime line of demarcation) by being much pickier about the application process. No more no-doc loans. Wells is making the subprime loans only to borrowers eligible for FHA insurance, so the bank can package the loans into securities and sell them.
In addition, new regulations have changed the nature of subprime lending. Banks are now less likely to be allowed to sell subprime loans to government-backed agencies. Further, lenders that make loans that meet stricter regulatory guidelines do so at the risk of being fully liable if the borrower is unable to repay the money.
Reuters notes industry insiders are trying to change the name of such loans to alternative or second-chance mortgages, rather than subprime. And they say the future for such products will likely be a much smaller niche market.
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