Just as quickly as the COVID-19 pandemic bolted across the country, that’s how fast the financing situation has changed for homebuyers. And whether the mortgage market will return to “normal” once the scourge subsides is anybody’s guess.
During the first 90 days of the year, the housing market was humming along at breakneck speed. Both existing and new home sales were up – 5.5 percent for existing houses and 7 percent for new construction – over the first quarter of 2019, and the money to finance those purchases was not only plentiful, but relatively cheap.
Since then, mortgage rates have slipped even lower. But lenders have tightened their underwriting rules to the point where only the best prospects – those with the most cash for a down payment and the highest credit scores – can qualify. And the new, stricter rules are likely to remain in place until the economy gets back on its feet – months, or even years, from now.
Low Rates, Higher Standards
By the end of April, the benchmark 30-year fixed-rate mortgage had slid to 3.23 percent, according to Freddie Mac. That’s the lowest since the mortgage investor began tracking rates in 1971, and down almost a full percentage point from 4.14 percent a year ago. Better yet, Fannie Mae, another government-chartered investor in home loans, predicted the rate would fall below 3 percent by 2021’s second quarter and remain there the rest of the year.
Lower rates mean buyers can choose between more house or smaller monthly payments. But that hinges on whether they can qualify – and only the best prospects can currently do that, because of the stiffened rules at some of the country’s largest lenders.
JPMorgan Chase has stopped taking anyone with a credit score under 700. And don’t apply at Chase if you don’t have at least a 20 percent down payment. First Horizon Bank has hiked its minimum credit score to 670, and no jumbo loans (mortgages above $510,400) are available there or at Wells Fargo, among others. Chase also has stopped making home equity loans.
Other lenders also have tightened, albeit “less publicly,” the Urban Institute reports. And the bipartisan think tank expects even more tightening in the weeks ahead. That would be on top of what the Mortgage Bankers Association says is an already dramatically constricting availability of credit.
A look at the unemployment and mortgage forbearance numbers shows why. As of May 21, some 38.6 million Americans had filed for unemployment benefits. That’s more than a quarter of the entire workforce, and the highest level since the Great Depression almost a century ago.
As of May 18, more than 8 percent of all mortgage borrowers – an estimated 4.3 million homeowners – are asking to be placed into a forbearance plan, meaning they can’t make their house payments and want some relief. That share among people with government-backed loans is even higher, at 10 percent. Furthermore, many states have banned foreclosures, at least for the time being.
Missed Payments at Play?
The record layoffs are driving an unprecedented spike in missed rent and mortgage payments. Apartment List’s mid-May report found that 31 percent of households failed to make their full May rent or mortgage payments, up from 24 percent in April. Worse, of those who were able to make their full housing payment on time in April, 16 percent had yet to pay anything in May.
Frank Nothaft, chief economist at data analytics firm CoreLogic, thinks the situation will get worse before it gets better. Without additional policy efforts to help borrowers in financial distress, he estimates a “four-fold increase in the serious delinquency rate” by the second half of next year.
Consequently, most lenders are being extremely cautious.
“Lenders are tightening their credit criteria to account for the higher likelihood of forbearance and delinquencies,” said Mark Fleming, chief economist at First American, a provider of title insurance and settlement services.
“While it is technically possible to buy a home without human contact, it’s still not possible to buy a house without income or when on unemployment,” said Keith Gumbinger of HSH Assoc., a mortgage reporting company.
That doesn’t mean you won’t be able to find financing. Some lenders are still in the market. Movement Mortgage, a top-10 lender that closed more loans in April than during any month in its history, is actually lowering its rates as well as its minimum credit score.
Elsewhere, United Wholesale Mortgage, another major source of financing, is offering rates as low as 2.5 percent to borrowers who work with independent loan brokers – but only for conventional mortgages at or below $510,400. And Angel Oak Mortgage Solutions, another wholesale lender, is back in the market with loans that don’t meet conventional standards – as long as you have 20 percent down.
Whether the rest of the mortgage market will loosen up, either soon or once the virus is under control, remains to be seen. But when the all-clear is sounded, it’s a safe bet that any changes will happen slowly – until unemployment subsides and people go back to work.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at email@example.com.