In a big break for borrowers with damaged credit, mortgage giant Wells Fargo is easing back into the market for subprime loans.

The bank, which is the nation's largest mortgage lender, reportedly has reduced its minimum credit rating for mortgage approvals to a FICO score of 600, down from 640 previously, according to a report from Reuters. Scores that low will only be accepted on applications for FHA mortgages that meet other criteria as well.

Mortgage lenders have been reluctant to re-enter the market for subprime loans, which played a major role in the housing bubble and were responsible for some of the biggest losses in the crash. Subprime mortgages, generally defined as those with credit scores below 640, made up only 0.3 percent of all new mortgages in October 2013, according to figures from the mortgage data firm CoreLogic.

By comparison, such loans accounted for nearly one-third of all mortgages originated during the boom year of 2003.

Falling demand a factor

Rising mortgage rates and sharply reduced demand for refinancing is seen as putting pressure on lenders to ease their credit standards in order to boost business. Although such loans represent increased risk to lenders, Wells Fargo appears to believe it has worked through enough of its backlog of troubled loans that its remaining exposure is low enough to start taking on a limited number of subprime loans again.

So far, Wells Fargo appears to be the only major bank willing to allow subprime lending on even a limited basis. However, many small, nonbank lenders have been coming back into the subprime market, allowing what they call "nonqualified loans" for borrowers that can meet certain criteria.

Be prepared to pay

Such loans carry significantly higher interest rates than regular mortgages, often as high as 10 percent, and have stiff down payment requirements as well, in the range of 30 percent or more. However, borrowers willing to pay up can obtain mortgages despite some very poor credit scores. Citadel Servicing Corp., the nation's largest subprime mortgage lender, reportedly has approved mortgages for borrowers with FICO scores as low as 490.

It's not clear whether other large lenders will follow Wells Fargo's example or will continue to take a cautious approach to easing credit. It does appear, however, that smaller lenders may be moving into subprime loans as a niche market and that may offer the best opportunity for borrowers with poor credit who are trying to obtain a mortgage.

Published on February 14, 2014