The Crisis Circle Is Complete: Wells Fargo Returns To Subprime

Tyler Durden's picture

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.

From RealtyTrac:

“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.

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Meat Hammer's picture

It's different this time, like last time.

Spastica Rex's picture

Watch what you say - you might destroy it, and they'll have to build the Matrix all over again.

Martial's picture

"Fed is stuck in its attempts to push rats higher"...yea that sounds about right. Time to jump ship.

knukles's picture

"There's always money in the banana stand."
-Linda Green

Son of Loki's picture

"It's only Fair that I am given a Big House with a zero-down, no job verification, 4%, never-pay-back mortgage."

Troll Magnet's picture

One of the less discussed aspects of this Fed-driven housing bubble is how they are enabling the broke ass counties to steal more from "homeowners" via rising property taxes.

Fuckers rape you in many ways, don't they?

zaphod's picture

Why shouldn't they? I'm going to pay for it again in the end not them. 

redpill's picture

Exactly they have no reason not to.  Does anyone doubt they would get bailed out again?


Also, that RealtyTrac statistic looks pretty suspicious.  Expect revisions.



bobola's picture

How does a guy with a failed business and a credit score in the 500's come up with $60,000 cash to buy a house..??

Heisenberged his way into the house..???

0b1knob's picture

"As a dog returns to its vomit, so fools repeat their folly."    Some book...

Occident Mortal's picture

They're not calling it subprime, this time it's called non-prime.

Totally different.

StychoKiller's picture

Shoulda went with "prime-challenged."

TheReplacement's picture

If the seller is a big bank, why not?  Fair is fair.

RaceToTheBottom's picture

But wait, we can get all the Chinese buyers that Canada is no longer taking.  They can buy all our houses......

Wahooo's picture

Well, our government and its banker friends during the past 5 years has certainly increased the supply of broke people who will qualify for these loans.  Government has become quite efficient at certain things.

Divided States of America's picture

Well the difference between mid 2000s and now is that the subprime population nowadays was the middle class population back then....the middle class of America is getting day there will be nobody left to squeeze and the cheespopes will be fighting among themselves. fuckers

Canadian Dirtlump's picture

I hope it's different in Canada this time finally and some fuckers get their faces melted off and I can go dumpster diving for a crib.

Grande Tetons's picture

I lived in Montreal for a stint in 1995, during the time Quebec wanted to separate. I was close to buying a house in Westmont for 300k. I convinced myself that it was a shitty investment. The same house today is north of a million.  Yep, je suis tres stupid. 


Catch-22's picture

It could have gone both ways… big gamble. 


20 years earlier, with the first referendum that failed by a margin of 1%, hundreds of companies left for other parts of Canada (especially Toronto) and slaughtered the local economy/employment. Main commercial arteries were boarded up for miles on end. It’s not an exaggeration to say they experienced a full-blown depression.  The few jobs advertised in the newspaper required 15 years experience minimum…  Had they managed to separate in the following years it would have been a disaster. Anglophones, which are by far the biggest group in Westmount, would have certainly left in droves for English speaking Canada. Your investment would have taken a major hit.


By the way, Montréal was a kick ass City in the 70s and 80s…  not so much anymore.

thamnosma's picture

I loved visiting there in the 80's when I lived in the Northeast.   Haven't been back since moving out of the region.   What happened to it?

Catch-22's picture



They let their infrastructure go to hell…

They still talk about separation, freaking out Anglophones and potential investors…

The best bar “Thursday’s” on Crescent street (a 30 year institution) has closed…

The “Cirque du soleil” (which was born there) can be seen in Vegas…





It’s really not the place it used to be.

Joe A's picture

Perhaps the French can invest in Quebec...oh wait.

Anyway, Montreal and and especially Quebec are lovely cities

Divided States of America's picture

Oh...yes...while immigration is being restricted thx to the Conservative govt, CAD weakening as immigrants pull out their money from Canada, financial sector job losses mounting, the fuckin cold weather making it less attractive, unlimited supply of condos propping up in major cities, many people in debt and levered to the moon via multiple mortgages via the own to rent model in a rising rate environment from ultra low rates. Yeah its different this time....the outcome will be different than in the subsequent rebound after 2008.

Unprepared's picture

I'll baptise it the "Post-Modern Normal"

May you live in circular times!

Jumbotron's picture

Proverbs 26:11

"As a dog returns to its vomit, so fools repeat their folly."


Kirk2NCC1701's picture

I don't disagree at all, but... the problem I have with all religious texts -- especially with the Bible, which I'm most familiar with -- is that they have these clever one-liners that are great for giving us a little bit of enlightenment and a nice dose of hubris which allows us to look down at others (as yet 'unenlightened' people).  Proverbs 26:11 is a good example of this.

What would be FAR more helpful for religious texts (including the Bible), is for them to offer a vision and a plan for personal development.  Alas, they don't.  I submit that a book like "The 7 Habits of Highly Effective People" does FAR more to growth, than some smart-ass lines from long dead sheep-herders.  Sheep-herders of limited education and questionable hygiene, BTW. 

And while I'm at it... I've got a bone to pick with this alleged 'Deity' (who is either a Space Alien or a figment of a fertile imagination of an ancient shaman), who clearly is either Co(s)mically insecure or a Galactic Über-Bully -- to have some camel/sheep-herding, semi-literate and smelly primitives slavishly obey and grovel at his invisible/imaginary Feet.  If it were me, I'd ask for some "ID".  And note that the Shock & Awe tricks that worked on Moses et al, will not work on me.  This 'Deity' had better impress me with the powers of 'Q' (for example), to prove that he is both real and 'Divine', i.e. on a Level II or Level III on the Kardashev* scale.  Whiz-bang phasers, space-shuttles and beaming-up/down won't impress me.


Spastica Rex's picture

Carl Sagan wrote an interesting novel called Contact that explores the second subject of your comment.

Overfed's picture

Slightly O/T. I have never understood why so many sci-fi authors posit that having a world government would be any kind of advancement. If anything, humans would have reached the pinnacle of social evolution if they were to have no need of government at all.

Spastica Rex's picture

I'm not thinking of any world-government utopias, as envisioned by sci-fi writers. Likely there are, but I'm sure not thinking of any.

edit: Gene Roddenberry (The Federation/multi-world government) not withstanding. I think Roddenberry was a Republican.

css1971's picture

Who was god?

Bible scholars have known for a fair old time that the Jewish and therefore Christian (and muslim) god is actually just the same god as the Canaanites and just one of a pantheon of gods worshipped at the time. Specifically he was the head of the pantheon, and called El (as in IsraEl, and Alah). Also, they studied the sky  where these gods appeared, El was Saturn. So to the ancient Israelites, Caananites, Philestines, pretty much everyone living in the region, Saturn was El, was God.

So If you get a telescope or even binoculars you can have a good old shufty at god.

Kirk2NCC1701's picture

"People do not believe lies because they have to, but because they want to." - Malcolm Muggeridge

Lest we get too arrogant and self-righteous, remember... NO one is exempt or immune from this basic human trait.

It takes dedicated practice to truth-seeking, and determination to not tolerate BS even within ourselves or our social or religious brainwashing, to minimize/mitigate this reality.

/ We now resume our regular scheduled programs of stand-up comics. / ;-)

TheReplacement's picture

Kirk, did you burn up another Enterprise?


Fireball in the sky!

Kirk2NCC1701's picture

LOL.  No, I can't take credit for that.  Maybe I pissed off one of the crew.  Again.

I seem to do a lot of that lately, as I get older and crankier, and less tolerant of BS.  ;-)

caShOnlY's picture

maybe the fact that Wells picked the absolutely worst moment to return subprime

take a look at the California Foreclosure Starts again - drastic?   Did they really pick a bad time? or is the ship starting to sink(emerging markets, China, Europe, etc.)?  I don't believe Wells Fargo timing is bad at all, "THE ONE BANK" obviously has an emergency plan to forestall the inevitable - again.  You will see the same players in the game as the music is starting to play. 

The key here is who will bear the counterparty risk?  I doubt foreign investors will be calling Goldman for some great investment products this time around.

So who is going to hold the bag of shit this time?

Who?(MyRA)Who? again,(MyRA) who will be the counter party(MyRA)?


Jason T's picture

history repeats because the nature, greed.. of man never changes.


predictable like the seasons.

Unprepared's picture

History doesn't repeat,

It rhymes with defeat

Waiiiit a minute,

I think I just lost count of my feet

Grande Tetons's picture

Mortgage underwriting toolkit. 

1. Mirror

Mr. Johnson, this is how it works...if you can breath on this mirror and I can see fog....your loan will be approved. 

BandGap's picture

My wife and I are building a home (I know, please spare me the crap) and we had a helluva time getting funding last fall. My credit score is 809, hers was 792. It was a construction loan, so maybe that was the problem.

After all the shit they put us through, and they got down to some nitty-gritty shit, I have a hard time understanding how some people get money so easily.

Excursionist's picture

I think you correctly diagnosed the difference.  Small construction loans are one-offs that require lenders to work, whereas productized subprime loans are akin to stacks of inventory waiting on shelves.

Side Note:  The article mentions Gary Goldberg having $60k for a downpayment.  Either his business snapped back smartly (see?  QE works!), or something doesn't add up with his tale of woe.

tiwimon's picture

More likely - he siphoned off the cash from the business then let the business fail - walked away with the cash


Known plenty of people who owned a business and know its imminent death so they siphon cash, then BK the business

Panafrican Funktron Robot's picture

I'm guessing he figured out a way to borrow the $60K, and then used that money to leverage the house buy.

Son of Loki's picture

Band, I don't pretend to understand. Here's a tale of two men; one a yong plastic surgeon down the block who wants to buy an $780k house and is having his balls wrung out jumping thru hoops, he said.....then there's my 26 y.o. lawn guy who just bought a $440k house in the next area, a Master Planned new homes area. The lawn guy said, "it was easy...just had to sign some papers and got a no money down loan." He said they "packaged it all together" whatever the heck that means.

This stuff is going on all over again even with Saturday morning adds for those "No Money Down" mortgages.

Blankenstein's picture

It seems there are more shady financing options available from builders when you are buying a new home.   

redpill's picture

You can't bundle construction loans.

JPM Hater001's picture

Top notch coverage.

Smiley's picture

Meet the new bullshit; same as the old bullshit.

thamnosma's picture

Great news!  We're going for broke here.

Wahooo's picture

No longer e pluribus unum, but rather "We go for broke".

Nos vado pro infractus.

Flounder's picture

aw shaddup the stock market is going up