By Nick Timiraos
Wells Fargo will lower its minimum credit score for certain
mortgages eligible for government backing, a sign that mortgage
lending standards may be starting to slowly thaw.
Franklin Codel, a top mortgage executive at the bank, announced
at a real-estate industry conference last week that the bank would
begin originating purchase loans backed by the Federal Housing
Administration with credit scores as low as 600, down from its
previous limit of 640, through its retail channel.
"The goal is to increase access to credit, especially for low-
and moderate- income borrowers and first-time home buyers," said
Tom Goyda, a bank spokesman. "These are fully underwritten, fully
documented loans, consistent with FHA program guidelines and
responsible lending principles."
The FHA doesn't make loans but it insures those that meet
certain standards. It requires down payments of at least 3.5% for
loans with credit scores as low as 580, and it requires down
payments of 10% for loans with credit scores below 580.
The policy change could lead other lenders to gradually relax
standards that were sharply tightened after the housing bust in
2008, said industry executives. Wells Fargo is the nation's largest
mortgage lender and funded more than $356 billion in originations
last year, or around 19% of all mortgages, according to Inside
Mortgage Finance, an industry newsletter.
Borrowers with credit scores below 620 have traditionally been
considered "subprime" borrowers. While the FHA has traditionally
served borrowers with weaker credit, it stood mostly on the
sidelines during the subprime mortgage bubble because its
income-verification standards, among other rules, were considered
too stringent. The agency's market share tumbled until the subprime
market disintegrated in 2007, after which it returned as a major
player.
Industry analysts have said that lenders are likely to slowly
ease credit standards this year because home prices have stabilized
and refinancing volumes have dropped, leaving banks on the prowl
for new business. "With volume going down, everyone is looking to
tweak, if not loosen, the underwriting in certain areas," said Guy
Cecala, publisher of Inside Mortgage Finance.
Still, banks face new regulations over mortgage underwriting
this year, and few expect a return to the go-go days of the
subprime boom that began in the early 2000s. Credit loosening "is
going to be slow, and it's going to be piece-by-piece," said Mr.
Cecala.
Officials in the Obama administration and at the Federal Reserve
have repeatedly raised concerns over the past year that
mortgage-lending standards, after being too lax during last
decade's housing bubble, have grown too stringent. Those comments
appear designed to jawbone the industry into removing so-called
"credit overlays," or additional underwriting rules that are
stricter than the minimum standards of the FHA or loan giants
Fannie Mae and Freddie Mac.
In a bid to further encourage such easing, the FHA last year
began allowing borrowers who have gone through a foreclosure or
bankruptcy but who have repaired their credit to become eligible
for a new loan after waiting as little as one year. Previously,
they had to wait at least three years.
Since the crisis hit, banks have been reluctant to make FHA
loans to borrowers with credit scores below 620 because of concerns
that they could be forced to buy back those loans or face other
sanctions if they have default rates that are above the industry's
average.
Wells executives have said that they were willing to ease
standards modestly because they are more confident that forthcoming
policies surrounding defaulted loan repurchases will provide more
clarity, according to people familiar with the matter. Wells could
undo its recent easing, these people said, if it isn't comfortable
with those rules when they are finalized.
Mr. Goyda said that the bank will evaluate any new lending and
"continue to see whether it's appropriate to make changes in the
future."
This isn't the first time that Wells has experimented with
easing standards on FHA-backed loans. In 2011, the bank said it
would began accepting applications with credit scores as low as
500. The cutoff was later increased to 600 and then to 640. "What
we found over almost a year...was a very, very tiny percentage of
those borrowers were being approved, and fewer of those were
ultimately funded," said Mr. Goyda.
Separately, Wells was hit with a federal lawsuit in 2012 that
accused the bank of "reckless" lending through the FHA program. The
bank has said it acted in good faith and it is fighting the lawsuit
in federal court in Manhattan.
Economists said Wells Fargo's change isn't likely to lead to a
big boost in lending immediately. "It is going to take some time
for that news to get out to the potential buyer--that now there
might be an ability to qualify whereas a year or two ago, that
wasn't the case," said Michael Fratantoni, chief economist for the
Mortgage Bankers Association. "I don't see a flood of applicants
coming in."
Average credit scores on FHA loans for home purchases stood at
around 690 in December, down from 700 in 2012, according to Ellie
Mae, a mortgage-software firm. Under a system devised by Fair Isaac
Corp., credit scores range from 300 to 850.
Write to Nick Timiraos at nick.timiraos@wsj.com