April 30, 2020
The availability of mortgage credit in March plummeted to the lowest level in five years amid a deepening economic crisis that is making banks leery of more borrowers requesting delayed payments thanks to the government’s stimulus program.
Mortgage Bankers Association’s newly released Mortgage Credit Availability Index, which is a gauge of how easy it is to obtain a home loan, fell 16% in March.
“Over 26 million Americans have filed for unemployment over the last month, leading to nearly 7%, 3.5 million, of all mortgage borrowers asking to be put into forbearance plans,” said Mike Fratantoni, Mortgage Bankers Association’s senior vice president and chief economist. “For FHA and VA borrowers, the share of loans in forbearance is even higher, at 10%.”
He added, “While the pace of job losses has slowed from the astronomical heights of just a few weeks ago, millions of people continue to file for unemployment. We expect forbearance requests will pick up again as we approach May payment due dates.”
Added Fratantoni, “The combination of stimulus payments, expanded unemployment insurance benefits, further fiscal and monetary actions, and states reopening will hopefully begin to stabilize forbearance requests and the overall economy.”
An estimated 25% of the loans written by Redfin Mortgage last quarter may not have been possible to originate under new lending standards, as the investors who buy the loans have become more selective about what they purchase.
“Thousands of Americans who were priced out of the housing market due to the affordability crisis of the past decade might finally see homeownership as within reach, especially given historically-low mortgage rates,” said Redfin senior economist Sheharyar Bokhari. “But unfortunately, they are now faced with another roadblock and may not be able to get a loan. Home equity is the primary way for Americans to build wealth. It’s important that policymakers address this tightening of credit, as it has raised the barrier to homeownership.”
At the high end of the market, banks have begun to retreat from jumbo loans, which are regularly used for purchases of more expensive homes. But average borrowers are also being squeezed. For example, JPMorgan Chase has tightened its borrowing standards. It has raised its credit score minimum to 700 and has begun requiring applicants to make a down payment equal to 20% of a home’s value.
Similarly, Wells Fargo and US Bank are reportedly shying away from riskier loans for borrowers who are unable to provide down payments of 20% and are increasing their FICO-score requirements to 680, including for FHA and VA loans, which typically feature credit-score requirements as low as 580. As unemployment continues to soar and more homeowners default on their mortgages, other banks might follow suit.
Freddie Mac and Fannie Mae recently issued statements noting that borrowers who are experiencing a hardship such as job loss, income reduction or sickness due to COVID-19 and are in forbearance are not required to repay missed mortgage payments all at once, but they do have that option. Borrowers can also set up a repayment plan to catch up gradually or a loan modification to help keep payments affordable.
Homeowners facing a hardship are entitled to up to 12 months of forbearance. Servicers will start with a shorter plan and reassess to see if an extension for up to 12 months is necessary.
“The national payment assistance program was created to provide immediate help to customers navigating this very uncertain time,” said Mark O’Donovan, CEO of Chase Home Lending. “If you’re still not able to afford your mortgage at the end of the initial three months, you can request delaying payments for additional months at the end of the forbearance period. Many customers who can resume making their full payment after the assistance period can defer missed payments to the end of the mortgage. We’ll check in with you near the end of the assistance period to help you understand your options.”
Don Layton, senior industry fellow at Harvard University’s Joint Center for Housing Studies and former CEO of Freddie Mac, states in a recent blog post that the reforms to the banking system, exemplified by the Dodd-Frank Act, have taken hold and are working.
He said, “That’s good news, both in general and for housing finance, where banks play many key roles – originators, servicers, investors (they own approximately 25% of all first single-family mortgages), lenders to non-bank mortgage companies, dealers in mortgage securities, and so on. Their stability is helpful at a time when other parts of housing finance are anything but.”
Layton added, “Banks, of course, have already begun to take large earnings hits as credit losses mount and they are impacted by dislocations in the economy that are underway. They are supposed to take risks, so that’s natural. But that’s a very different outcome than having bank failures and near-failures being the cause of an economic downturn, and there is no sign of any market loss of confidence in the banking system. Again, this contributes to housing finance stability. Hopefully, this will continue to be true through the worst of the downturn.”
Mortgage applications decreased 3.3% from one week earlier, according to data from the Mortgage Bankers Association’s weekly mortgage applications survey for the week ending April 24. The Refinance Index decreased 7% from the previous week and was 218% higher than the same week one year ago. The seasonally adjusted Purchase Index increased 12% from one week earlier. The unadjusted Purchase Index increased 13% compared with the previous week and was 20% lower than the same week one year ago.
Joel Kan, Mortgage Bankers Association’s associate vice president of Economic and Industry Forecasting, said “the news in this week’s release is that purchase applications, still recovering from a five-year low, increased 12% last week to the strongest level in almost a month. The 10 largest states had increases in purchase activity, which is potentially a sign of the start of an upturn in the pandemic-delayed spring home-buying season, as coronavirus lockdown restrictions slowly ease in various markets. California and Washington continued to show increases in purchase activity, with New York seeing a significant gain after declines in five of the last six weeks.”
Added Kan, “Contributing to the uptick in purchase applications was that mortgage rates fell to another record low in MBA’s survey, with the 30-year fixed rate decreasing to 3.43%. However, refinance activity declined 7%, as rates for refinances likely remained higher than those for purchase loans. Lenders are still working through pipelines at capacity, and observed changes in credit availability for refinance loans have also in turn impacted rates.”