As a lender, I've been asked more times than I can count how mortgage lending has changed in the wake of the coronavirus. In the early days of COVID, with shelter-in-place starting to take effect, businesses shutting down, and rates dropping rapidly, no one really knew what was going to happen next. Once economists could tell that this was going to have a large impact on employment numbers, naturally, they also knew that meant people wouldn't be able to pay their mortgage.
Two things weighed heavily on the minds of mortgage CEOs when all of this started:
How many people will stop paying their mortgage as a result of the drop in income?
How many people who recently closed a loan will refinance before making 6 payments?
As such, lenders began changing guidelines to reduce risk due to the chaos surrounding the U.S. economy.
COVID-19 Impact on Lending Industry
First and foremost was the issue of forbearance requests. If a lender closes a loan, and the customer goes into forbearance before they’ve made six payments, this counts as an early payment default, or EPD. The originating lender loses any profit made on that loan and the expenses associated with processing and closing.
If a lender closed a loan where the client went into forbearance prior to making their first payment, not only would the bank lose its revenue on the loan, but there could be a hefty penalty assessed by the FHFA.
And there is an investor buy-back clause applicable to mortgages sold to Fannie Mae and Freddie Mac. If a loan stops performing for any reason before six payments have been made, again, this is known as an EPD. If a mortgage is paid off within the first six payments, called an early pay-off (EPO), the originating bank loses any profit made, including originators’ paid commission.
Lenders are now forced to re-verify employment and income the day of closing. In some cases, this had a negative effect. But it also saved lenders from closing a costly loan.
How Lenders Evaluate Risk in COVID Times
While lenders look at a lot of things, employment and income are always at the top. What lenders are looking for with income is continuity and sustainability. During the pandemic, these things are sometimes harder to verify.
In total, the four things lenders look at are income, assets, credit, and collateral. If there is a problem with one of those four things, it can be difficult to get a mortgage loan.
With the added risks to lenders, new guidelines started to appear, which were meant to keep lenders in a safer position on issuing loans during COVID. In some cases, lenders now want to see reserves. More due diligence is required, too, since the industry has been so heavily impacted.
For example, say someone who was working full-time got their hours cut by 20% but then returned to full-time work within a short period of time. This would require documentation to support the claim.
Here's another example. Let's say someone is a self-employed event planner. There is no event planning income for the foreseeable future, so that presents a problem in the eyes of an underwriter. The inability to generate income until an unknown date would not lend to qualification for a mortgage loan.
Available Loan Products Post-Coronavirus
Another effect on the mortgage industry was the lack of available products due to margin calls when the stock market crashed. The buyers of these products lost their cash. Many non-agency loans were sold in REITs on Wall St. These were purchased by large institutional investors. Once the market crashed due to COVID-19, margin calls evaporated liquidity overnight.
The products most heavily affected by this cash crunch were jumbo loans and non-QM loans. Basically, all non-conventional loans dried up instantly. This did not include FHA, VA, and USDA loans, and since this initial retraction of products, we’ve seen some of these products (jumbo and non-QM) slowly re-enter the market—however, not nearly to the scale that it was pre-COVID.
In addition, there were a few jumbo mortgage avenues but mainly within the big banks. And qualification for these mortgages became increasingly difficult. Initially, many jumbo programs were retracted outside of what was available from the primary large depository lenders such as Chase, Bank of America, etc. The ones that were left tightened lending guidelines quite a bit. But in the past 3-4 months, jumbo loans have started to re-enter the market on a wider scale.
A positive effect from the pandemic is that mortgage rates are at an all-time low. This has caused a wave of refinancing to occur. People are able to save money, left and right. Additionally, people are able to buy higher-priced homes. So, this has caused a spike in real estate values.
How Has COVID-19 Impacted Lending Operations?
The impact this has on banks is two-fold. On one side, business has never been better. On the other, there aren’t enough working hours in the day to manage all of the loan requests. Turn times are much longer, which causes significant frustration, and operational costs have increased exponentially. Lenders have had to go on hiring sprees, but there is only so much experienced talent available in the industry. And now it comes at a premium, so overhead costs are up.
This is a great time to snag a historically low cost of money. It is very doable. But keep in mind, the magnifying glass lenders use just got a lot stronger. Patience is key, but it will pay off in the end if you remain a qualified borrower in light of COVID-19 restrictions.
By Robert Ring, Bigger Pockets