Mortgage market update: Lending standards tighten, but business is still brisk

by Korry Keeker

Four months after mortgage lenders started to tighten their standards in reaction to COVID-19-related uncertainty, Chicagoland lenders say they have yet to see a dramatic mortgage slowdown.

Instead, they report steady business — at a safe distance — as lenders work remotely and borrowers take advantage of low interest rates. According to mortgage giant Freddie Mac, the average rate on a 30-year fixed mortgage was 3.01% for the week of July 23. That’s slightly up from a record low of 2.98% on July 16.

Ben Cohen, who is a senior vice president of mortgage lending at Guaranteed Rate, says the company set a single-month record in June with $10.5 billion in loan volume. The 30-year rate in June was slightly higher than July’s numbers, fluctuating between 3.13% and 3.21%.

“The company volume is 100% up from where it was last year,” Cohen said. “We don’t know what the future holds, but interest rates have been historically low and we’re writing a ton of mortgages.”

While Guaranteed Rate is one of the largest retail lenders in the United States, smaller lenders also say they’ve seen brisk activity.

“I’ve been in the business 23 years, and I’ve never seen rates so low,” said Jorge Flores, who is vice president of lending at Neighborhood Loans. “A lot of people are taking advantage if they’re not affected by COVID. And a lot of people are still on the fence, because they don’t know what’s going to happen.”

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Brian Salomon, a senior mortgage consultant and vice president of lending at Blueleaf Lending, also sees a great deal of his clients caught in wait-and-see mode. “The future is going to depend on how the pandemic ends up affecting the economy,” he said. “If the economy takes a hit and more people lose their jobs and aren’t able to take on mortgages, at some point that’s going to weigh on the banks. If that happens, it wouldn’t surprise me if they tighten things even more.”

Setting the standards

JPMorgan Chase, which is one of the largest lenders in the United States, dramatically tightened their standards on April 13. The company announced that borrowers needed a FICO credit score of 700 or above and a 20% down payment for almost any loan. (The requirements don’t apply to Chase’s DreaMaker program, which provides loans to low- to moderate-income borrowers.)

Lending-industry observers wondered how tight the standards would get throughout the market. So far, we’ve seen most lenders hike their FICO minimum to 700 for jumbo loans, mortgages that exceed the conforming-loan limits set by Federal Housing Finance Agency. The limit is $510,400 throughout Illinois, but as high as $765,600 in a few U.S. counties. Guaranteed Rate is one of the lenders that now requires a 700 minimum for a jumbo loan.

“Some lenders can do a 680 on a jumbo mortgage, but there were other alternative lenders that were doing 640s,” Cohen said. “Those brokers are the guys that closed up shop.”

Guaranteed Rate raised its FICO minimum to 640 for FHA loans and up until recently required borrowers to have as many as four months of mortgage payments in the bank. That latter requirement has eased in the past few weeks.

Blueleaf and Neighborhood Loans now typically require a 640 FICO score for an FHA loan. Before COVID-19, Neighborhood Loans required a 580 minimum. As for down payments, not much has changed. Neighborhood Loans still accepts a 3% down payment on a conventional loan and 3.5% on a FHA loan.

“Some of the bigger banks and mortgage companies made some drastic changes as far as down payments,” said Flores. “For us, we didn’t go to that extreme. We made minor adjustments to ensure our company’s longevity, and as states have opened up, some of those modifications have started to be reversed.”

What’s been reversed? In April, Neighborhood Loans tightened its debt-to-income requirements to a back-end ratio of no more than 50%. A month ago, they eased that to the previous norm of 56.99%.

“We’re up to date with what’s going on,” Flores said. “If we do go back to phase 3, phase 2, if there are hard layoffs … we’re not looking at drastic changes on our end. We’re well prepared and ahead of the game.”

Debt-to-income requirements haven’t changed at Guaranteed Rate. The company typically requires 43% on jumbo loans and 45% on conventional ones, with a “little wiggle room,” Cohen said.

‘Are you working?’

Besides the tighter standards for credit scores and down payments, mortgage lenders are now stricter about verifying employment. Before the pandemic, lenders would typically verify a borrower’s status 10 to 14 days before closing. Today, with the job market in flux, lenders are reverifying multiple times, including on the day of closing.

“We’ve always verified employment; now we’re doing it that much closer to your closing,” Salomon said. “The extra diligence is at the end of the day before the closing, the morning of the closing. We’re sending out a form making sure that you’re still able to pay the mortgage.”

Fannie Mae and Freddie Mac now require borrowers to provide all their income documentation within 60 days of the initial loan application. Before, the standard was 90 to 120 days.

“Before COVID, we didn’t require pay stubs all the way to funding,” Flores said. “Now, if they close on Monday, we need to verify on Monday. We need today’s pay stub. All the homeowners understand what we’re going through right now. If we didn’t have COVID around, we wouldn’t be asking for verification a week before closing. We believe in everybody’s best interest, and we’re working upfront to ensure a smooth process.”

Guaranteed Rates now verifies the current pay stub within two weeks of closing and calls the employer 24 hours before closing. Cohen says the company’s automated asset verification system allows them to input a borrower’s W-2 credentials and get quick approval. “We never required income verification two weeks prior to closing before, but people are getting salaries reduced,” Cohen said.

For self-employed borrowers, the standards have always been considerably tougher, and that hasn’t changed in the past few months. In June, due to COVID-19, Fannie Mae and Freddie Mac began asking for year-to-date profit-and-loss statements that show a borrower’s revenue, expenses and net income. If your client prepares the statement personally, rather than hiring an accountant to do so, they’ll need to provide at least two months of bank statements to support the profit-and-loss statement.

The goal is to make sure that a self-employed borrower’s income hasn’t dropped off radically in the past few months due to the pandemic. That’s a difficult hurdle to jump for small-business owners who were forced to shut down or reduce their capacity.
Many lenders also require six months of payment reserves (covering principal, interest, taxes and insurance) to make sure that self-employed borrowers keep up with their payments.

“The self-employed get it the worst,” Salomon said, adding that these kinds of stringent standards were generally only required for self-employed borrowers seeking jumbo loans in the past, but that now they’re the norm for conventional products too. “We’re just following guidance from Fannie Mae and Freddie Mac.”

Considering forbearance

There’s no doubt the novel coronavirus has resulted in some being unable to pay their housing costs. The Mortgage Bankers Association announced on July 27 that the total share of home loans in forbearance fell for the sixth straight week to 7.74%. MBA estimates that 3.9 million homeowners are in forbearance, down from 4.3 million (or 8.55%) on June 7. Only 0.25% of home loans were in forbearance on March 2, when the first coronavirus-related deaths in the U.S. were reported.

The CARES Act grants borrowers with loans backed by the federal government a forbearance period of up to 360 days, if needed. However, when the legislation was signed in March, there was confusion as to whether borrowers would need to wait a mandatory 12 months after their forbearance period ended to apply for refinancing or new-purchase mortgages.

In the near term, this could potentially impact your clients who are looking to refinance in order to take advantage of today’s low rates. But it also could spell trouble for those who want to downsize or move in the near future. In an attempt to quell these uncertainties, FHFA announced in May that Fannie Mae and Freddie Mac would allow borrowers to get another loan as long as they made three consecutive months of payments after their forbearance period concluded.

“If people are in forbearance, we advise them to get out of forbearance immediately,” Flores says. “A lot of the customer service lenders didn’t explain forbearance, so we’ve heard from borrowers who weren’t really educated on what that means. I try to explain to them, if you’re on forbearance, that’s just telling us that you have a financial hardship and you can’t pay your bills.”

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