Wells Fargo has announced that it plans to begin originating FHA-backed loans for borrowers with credit scores as low as 600. This new cut-off is 40 points below Wells Fargo’s current floor, and 20 points below what has traditionally been considered to constitute a “subprime” borrower.

After the collapse of the housing market, faced with rampant repurchase liability and crushing losses on their books, lenders dramatically tightened their underwriting standards to avoid further losses. The qualified mortgage rules which entered into effect this year further discourage subprime lending, especially to borrowers with high debt-to-income ratios. As a result of these post-bubble policies, a large class of potential homebuyers, those with low-to-moderate incomes and/or deficient credit histories, have been largely denied access to funding for several years.

Necessary Progress or Mortgage Crisis Relapse?

With home prices stabilizing and mortgage delinquencies at a six-year low, perhaps now should be the time for a gradual but controlled relaxation of lending standards. Cautious optimism seems to be the appropriate response to Wells Fargo’s latest move, which of course could signal either necessary progress towards a robust housing market, or, alternatively, a relapse into the sort of risky lending practices that precipitated the mortgage crisis in the first place. Reportedly, Wells Fargo will require its new subprime customers to meet “strict criteria,” evidencing their ability to repay, in addition to the requirement that each of the mortgages be guaranteed by the Federal Housing Administration.

It remains to be seen whether other big banks will follow Wells Fargo’s lead. As things currently stand, the lending world is caught in something of a “low-risk, low-reward” limbo. As the economy continues to stabilize, and with new processes and controls in place to ensure loan quality, the prospect of larger pay-offs may entice bolder lenders to deviate from the prohibitive lending requirements currently in place, and even the confines of the Qualified Mortgage Rules.