Wells Fargo Targets At-Risk Areas with New Lending Limits

Wondering what the worst housing markets in the country are? Wells Fargo has made a list.

Wells Fargo–the
second-largest U.S. provider of home loans–denoted "soft,"
"distressed" or "severely distressed" markets in 24
states and Washington, D.C. in a document sent to mortgage brokers this week, according to Reuters. The list identified more than 200 troubled markets.

Wells Fargo will restrict lending in those areas starting tomorrow, by limiting loan size to a percentage of home values–no matter how safe the borrower seems.

The markets include:

  • At least 33 risky markets in California, with a minimum of 20 counties,
    including Los Angeles and San Diego, labeled as being in severe distress.
  • Thirty-three high-risk markets in Florida and 15 in Michigan
    and Virginia. Maryland and Ohio have 13 at-risk housing markets apiece.
  • Worrisome markets in Arizona, Colorado,
    Connecticut, the District of Columbia, Illinois, Louisiana,
    Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New
    Jersey, New York, Oregon, Pennsylvania, Rhode Island,
    Washington, Wisconsin and West Virginia.

Wells Fargo is a large lender, so further restrictions could mean tough times for troubled homeowners in at-risk markets trying to refinance. It’s not likely to help buyers dig into that bloated housing supply–which the Commerce Department revealed Wednesday had swelled to a 9.9 month supply, the largest in more than 26 years–in those areas, either.

The new Freddie Mac, Fannie Mae and FHA regional loan limits will be announced by March 14, the deadline the economic stimulus bill gave HUD to determine area home prices; that should help some spots–especially areas with high-cost homes like California. Previous FHA limits in many areas of California were so low that many homebuyers purchasing moderate homes–which often were above the loan limits because the high average area home price was so high–couldn’t qualify.

Wells Fargo’s need (and all lenders’ need) to cover its back is understandable–protecting against future risk is important, and our financial system needs it to recover. But the outcome of Wells’ stricter lending standards really could potentially make the refi and buy situation worse.

Will other banks follow suit?