Six ways the CORONAVIRUS Pandemic has affected the Mortgage Market: What Consumers Need to Know
The Coronavirus pandemic has had a profound effect on our society, with a tragic loss of human life and crippling of our economy. From retail to travel to housing, there is no industry that hasn’t felt the sting. But the mortgage market has experienced unique and sometimes contradictory manifestations of the pandemic, with both good and bad news for buyers and homeowners who wish to refinance.
Rates remain low…and lower!
First, the good news: Mortgage interest rates have settled into all-time lows, as the Fed’s policies to stimulate the economy spill over into home loans.
After a few weeks of wild volatility when the pandemic first took us by storm, mortgage interest rates have gone to record lows and look to be stable, benefiting home buyers and tens of millions of Americans who are eligible for a money-saving refinance.
In fact, the Washington Post just reported that as of April 30, mortgage interest rates fell to their lowest point since 1971, which is the first time that Freddie Mac started indexing home loan rates.
While rates are still expected to go up and down incrementally every day, there’s no denying that we’re in the lowest mortgage rate environment we’ve ever seen.
Of course, not everyone can get access to those low interest rates since…
Lenders are tightening guidelines.
Low interest rates are great, but it’s getting harder and harder to actually get approved for those rates, as lenders are significantly tightening their underwriting guidelines. For some, like Chase bank, that means borrowers need a 700-credit score (see below) as well as a 20 percent down payment for purchases, a massive jump from the only 3.5 percent down needed for many recent loans. Other large national banks are following suit in an attempt to inject more conservatism into their lending decisions.
Tightening guidelines to buffer risk come in the form of lower Loan-to-Value and higher credit score requirements, and alternative loan programs like jumbo loans and non-QM loans have seen the most retraction.
Lenders aren’t just reacting to increases risk, but a dearth of liquidity. In fact, the Mortgage Bankers Association’s Mortgage Credit Availability Index (MCAI) reports that available mortgage credit fell by 16 percent in March, bringing it to the lowest level since July 2015.
Credit score requirements are on the rise.
The most obvious example of those tightening guidelines is seen with credit scores, with higher standards for borrowers looking to get approved for purchase loans or refinances. While many programs made allowances for borrowers with 620 or 640 scores just a few months ago, borrowers now may need a 700+ score to get approved for the same loan. In fact, a 700+ FICO is seen as the “new normal” in the industry.
While the average US Fico score was 703, according to Experian, every age group under 50+ holds an average FICO under 700, and only about 40 percent of US consumers hold a 700+ score.
Interest rates on government loans (VA, FHA, USDA) have been artificially inflated due to increased risk for lenders?
Mortgages backed by the federal government, like FHA, VA, and USDA loans, comprise 62% of all first-lien mortgages in the United States, according to the Urban Institute. So, when the Coronavirus pandemic sent shockwaves through the mortgage markets and shook servicers to their core, lenders responded to that risk by increasing interest rates. With FHA loans the choice for about 20 percent of all home buyers these days, and a popular lending vehicle for first-time buyers, those rate increases may detract from homebuying going forward.
However, the Federal Bank’s promise to buy a “near-unlimited supply” of government-backed mortgages should slow further rate increases and stabilize the government-back loan market.
Lenders have dramatically increased rates on cash-out refinances.
According to CoreLogic, American homeowners are now sitting on more than $428 billion in equity, in large part due to steady increases in home values over the last eight years or so. That’s an enticing resource for homeowners who may have lost their job, shuttered their business, or seen their incomes reduced in the wake of the Covid-19 pandemic, and applications for cash-out refinances have risen accordingly.
In fact, according to data firm Black Knight, cash-out refinances hit an all-time high in Q4 of 2019, as US homeowners tapped $41 billion out of their homes in those three months alone. (No data is available for Q1 of 2020 yet.)
However, it’s extremely risky for lenders to offer cash-in-hand from home equity and higher loan amounts to a large pool of borrowers who may soon lose their jobs or see a decline in income. Remember that we’re not just talking about refinancing to lower the rate and payment (called a ‘rate & term refinance’), but actually taking cash out of the property. Lenders are mitigating that risk by increasing loan rates, trying to stave off a wave of people who are in negative equity positions but have trouble paying their mortgage payment every month, a factor that contributed to record foreclosures and distressed properties during the last housing crash.
Widespread mortgage forbearance is a major issue.
The Coronavirus has caused about 30 million Americans to lose their jobs or close their businesses, and that means a whole lot of people who are in danger of not being able to make their mortgage payment next month. The federal government responded quickly once this pandemic struck, looking to aid homeowners by setting rules for forbearance that allows anyone with a federally-backed home loan to stop making payments for up to one year (if they can demonstrate a financial detriment due to Covid-19). Other non-government lenders are offering similar payment relief packages to their borrowers, with differing arrangements and timelines.
And we’re definitely using that forbearance option, as requests to skip payments rose by 1,896% between March 16 and March 30 along according to MarketWatch.com. Similarly, the Mortgage Bankers Association reports that the number of mortgage loans in some sort of forbearance jumped from 0.25% to 2.66% during the month of March. As of the middle of April, almost 3 million American homeowners were in forbearance, which means more than 1 in every 20 loans wasn’t paying, according to the real estate data firm Black Knight.
While it may be necessary, widespread forbearance will ultimately hurt the mortgage industry, housing market, and come back to bite homeowners. That’s because these mortgage servicing companies are still beholden to their investors, but face a catastrophic cash shortage with no “backstop” in place. The good news is that the various experts and mortgage associations are working with the government to solve this crisis and keep servicers afloat – who then can keep lending to consumers.
We’re going virtual.
One effect of the pandemic and stay-at-home orders is that businesses have adapted by going virtual, and the real estate and lending industries haven’t missed a beat thanks to technology that was already in place.
The Federal Reserve released new guidelines on April 15 that called for lenders to postpone appraisals for up to four months after a purchase loan or refinance closes, and about half of all states have instituted electronic notarization for mortgage signings, with more states expected to follow suit. It is still uncertain when this will take affect in Maine.
Across the nation, real estate agents are offering virtual showings and open houses, buyers are getting used to 3D video tours before they buy, and lenders and title companies are doing business online and virtually whenever possible.
What’s next for the US mortgage market, homeowners, and those looking to buy a home or refinance? It’s clear that the Coronavirus pandemic has caused unprecedented challenges but also golden opportunities for some borrowers, buyers, and investors.
Please contact me if you have any questions or would like to be updated about important changes.