Wells Fargo has stopped offering a popular adjustable-rate mortgage designed for home buyers with troubled borrowing histories, becoming the latest lender to curtail its exposure to the subprime market in response to regulatory and market pressures.
The San Francisco-based bank discontinued an adjustable-rate mortgage, or ARM, known as the "2/28" at the end of last week, according to a statement issued Monday. The loan started with a low fixed rate for the first two years and then adjusts twice annually during the final 28 years of the debt.
Wells Fargo, the fifth-largest U.S. bank, also dropped three other types of subprime mortgage products.
A long list of other major lenders, including Countrywide Financial and Washington Mutual, have previously said they would will stop making 2/28 ARMs.
The initial teaser rate on these kinds of exotic loans helped complete home sales to buyers who couldn't qualify for more conventional mortgages because of tarnished credit or inadequate incomes.
As the interest rates on risky ARMs rose during the past year, more borrowers are missing payments or just walking away from their loans.
The problems have bankrupted some subprime lenders and driven up the losses of others. The troubles have depressed the credit ratings on subprime mortgage bonds and prompted federal banking regulators to advise lenders to screen prospective borrowers more rigorously.
Having posted a $4.5 billion profit through the first half of this year, Wells Fargo has been largely unsullied by the subprime mess so far, and hopes to keep it that way with its precautionary move.
"These changes are being made to align our practices with industry guidance, as well as appropriately respond to recent downgrades by key ratings agencies regarding subprime bonds," Wells Fargo said in its statement.