Those of our readers focused on the state of the housing market will undoubtedly remember this chart we compiled using the data from the largest mortgage originator in the US, Wells Fargo. In case there is some confusion, as a result of rising interet rates (meaning the Fed is stuck in its attempts to push rates higher), the inability of the US consumer to purchase houses at artificially investor-inflated levels (meaning housing is now merely a hot potato flipfest between institutional investors A and B), and the end of the fourth dead-cat bounce in housing (meaning, well, self-explanatory), the bank’s primary business line – offering mortgages – is cratering.
So what is a bank with a limited target audience for its primary product to do? Why expand the audience of course. And in a move that is very much overdue considering all the other deranged aspects of the centrally-planned New Normal, in which all the mistakes of the last credit bubble are being repeated one after another, Reuters now reports that the California bank “is tiptoeing back into subprime home loans again.“
And so the circle is complete.
For those who may have forgotten the joys of a subprime lending bubble, here is a reminder from Reuters.
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.
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.
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.
And in a world in which the new Wells Fargo is the old Wells Fargo, surely there will be companies willing to be the new New Century. Sure enough:
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.”
Also, remember when lenders swore they were very conservative with who they make loans to, and their strict loan standards? Yup: that particular lie is also back.
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. 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.
Uh, there is a reason those borrowers are subprime. And it is: because they traditionally do not pay back their loans! But this appears to be one of those rocket surgery things that a strapped C-Suite has no choice but to confuse as it scrambles to compensate for structural revenue losses, and is willing to boost short-term revenues by offering anyone “who can fog a mirror” a mortgage. Surely, by the time the bank’s balance sheet implodes, it will be some other CEO’s problem.
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.
But don’t worry, this time it’s different. Really
Subprime mortgages were at the center of the financial crisis, but many lenders believe that done with proper controls, the risks can be managed and the business can generate big profits.
Naturally, once Wells opens the floodgates, every other bank will promptly follow:
With Wells Fargo looking at loans to borrowers with weaker credit, “we believe the wall has begun to come down,” wrote Paul Miller, a bank analyst at FBR Capital Markets, in a research note.
Lenders have an ample incentive to try reaching further down the credit spectrum now. Rising mortgage rates since the middle of last year are expected to reduce total U.S. mortgage lending in 2014 by 36 percent to $1.12 trillion, the Mortgage Bankers Association forecasts, due to a big drop in refinancings.
The only missing pillar of the next subprime crisis is the spin that makes subprime lending seem not only ok, but in fact, necessary.
Some subprime lending can help banks, but it may also help the economy. In September 2012, then Federal Reserve Chairman Ben Bernanke said housing had been the missing piston in the U.S. recovery.
A recent report from think tank the Urban Institute and Moody’s Analytics argued that a full recovery in the housing market “will only happen if there is stronger demand from first-time homebuyers. And we will not see the demand needed among this group if access to mortgage credit remains as tight as it is today.”
The straw on the camel’s back: just like last time, when this subprime bubble bursts, it will once again drag down Fannie and Freddie. Because humans apparently have a genetic inability to recall any historical lessons older than five years.
Wells Fargo isn’t just opening up the spigots. The bank is looking to lend to borrowers with weaker credit, but only if those mortgages can be guaranteed by the FHA, Codel said. Because the loans are backed by the government, Wells Fargo can package them into bonds and sell them to investors.
The funding of the loans is a key difference between Wells Fargo and other lenders: the big bank is packaging them into bonds and selling them to investors, but many of the smaller, nonbank lenders are making mortgages known as “nonqualified loans” that they are often holding on their books.
And not only the GSE: any and all idiots who buy subprime exposure direct, deserve all they get:
Citadel Servicing Corp, the country’s biggest subprime lender, is trying to change that. It plans to package the loans it has made into bonds and sell them to investors.
Citadel has lent money to people with credit scores as low as 490 – though they have to pay interest rates above 10 percent, far above the roughly 4.3 percent that prime borrowers pay now.
No story about subprime would be complete without the human touch, and one person’s story.
As conditions ease, borrowers are taking notice. Gary Goldberg, a 63-year-old automotive detailer, was denied loans to buy a house near Rancho Cucamonga, California. Last summer he was forced to move into a trailer park in Las Vegas.
Going from 2,000 square feet to 200 – along with his wife and two German shepherd dogs – was tough. He longed to buy a house. But a post-crash bankruptcy of his detailing business had torched his credit, taking his score from the 800s to the 500s.
“There was no way I was going to get a mortgage,” said Goldberg. “No bank would touch me.”
But in December, he moved into a 1,000-square-foot one-story home that he paid $205,000 for. His lender, Premiere Mortgage Lending, did not care about his bankruptcy or his subprime credit score. That is because Goldberg had a 30 percent down payment and was willing to pay an 8.9 percent interest rate.
Brilliant – an 8.9% interest rate for a person who can barely make ends meet: what can possibly go wrong. Oh wait, we know: maybe the fact that Wells picked the absolutely worst moment to return subprime – just as the broader housing market is about to take yet another steep plunge for the worse, as the recent foreclosure report from RealtyTrac confirmed, when it reported a dramatic 57% increase in California foreclosure starts from a year ago.
“The monthly increase in January foreclosure activity was somewhat expected after a holiday lull, but the sharp annual increases in some states shows that many states are not completely out of the woods when it comes to cleaning up the wreckage of the housing bust,” said Daren Blomquist, vice president at RealtyTrac. “The foreclosure rebound pattern is not only showing up in judicial states like New Jersey, where foreclosure activity reached a 40-month high in January, but also some non-judicial states like California, where foreclosure starts jumped 57 percent from a year ago, following 17 consecutive months of annual decreases.”
In short – the party is over, and the banks are once again scrambling to delay the day of reckoning as much as possible.