As banks face an ever-shrinking market for mortgage loans, some of the largest lenders have begun to fight back. Both JPMorgan Chase (JPM -0.79%) and Wells Fargo(WFC -1.98%) have announced their intention to lower lending standards in order to snag more of the simmering demand they see in the mortgage market.
Despite the Federal Reserve's most recent survey of loan officers, which reflected lower demand for home mortgages, these banks are loosening restrictions to the point where it appears they may be creeping back into subprime territory.
Mostly absent from this discussion is Bank of America (BAC -1.29%), whose Countrywide acquisition made it the poster boy of all that went wrong with the pre-crisis mortgage lending model. Will B of A be forced to follow suit, or risk being shut out of the market?
Reducing restrictions a little at a time
JPMorgan and Wells Fargo have been relaxing standards on higher-priced loans for the past few months. Last spring, JPMorgan did away with its 640 minimumcredit score requirement for the Federal Housing Administration's streamlined mortgage refinance program. Wells has lowered its own credit score requirements to 600 -- a number widely considered to be in the "subprime" category.
Downpayments are dropping, too. In areas like Florida, where the housing crisis hit hard, JPMorgan is lowering the minimum downpayment to just 5%,from the previous 10%. For nonconforming jumbo loans, Wells had lowered its downpayment requirements to 15% from 20%. Bank of America has also relaxed some standards in the same hard-hit markets as JPMorgan, though no details were given.
The wave of the future?
Both banks note they are not taking too many chances. JPMorgan reduced downpayments for states like Arizona, Nevada, and Florida because they have recovered to the point of no longer being considered distressed areas. And while Wells Fargo is targeting customers with less robust credit, it is doing so only with loans that fall under FHA guidelines. This way, the bank is not required to hold the loans on its own books, but can package them into bonds to sell to investors.
Will Bank of America join in? Most likely, yes -- but, having been burned badly during the subprime crisis, it might wait to see how things shake out for its rivals. Under the watchful eye of CEO Brian Moynihan, the bank had retreated from the mortgage arena since the crisis, but it has made recent efforts to bolster its share of the existing home loan market.
While some analysts see danger in these relaxed mortgage standards, others note tight credit isn't helping the housing market. Also, new mortgage rules created under the auspices of Dodd-Frank, which went into effect on January 10, will likely put the brakes on any truly risky lending on the part of banks, since they face increased liability if they do so. For Bank of America, caution is likely to be the operational word, particularly when it comes to any big changes on the mortgage front.