Covid-19 and New Mortgage Financing • Aaron Nawrocki • Capital M Lending • Portland, Oregon
Covid-19 is having widespread and unpredictable effects across multiple business sectors. Bars and restaurants are among the hardest hit industries and suppliers such as craft breweries and food purveyors are starting to suffer too. Many industries that are not shut down completely are working shortened hours or laying off a portion of their staff. The mortgage industry is feeling the effect as well. Some of these folks had real estate purchases in process and their layoff stopped them from buying a home. Mortgage lenders are also worried that some new homebuyers will lose their jobs over the coming months and that they may be unable to pay their new mortgages. There’s an additional concern that some of these mortgages may go straight into forbearance. It’s beginning to have an effect on how mortgage loans are approved and closed.
Mortgage lenders make revenue by closing mortgage loans and selling them. They are creating a product for sale, much as Honda makes cars. If they can’t sell the finished product, they don’t want to make it, as holding inventory would put them out of business. To help ensure they don’t get stuck with loans they can’t sell, banks are changing lending criteria and not making certain types of loans. In essence, banks are only building silver Honda Accords – no purple or brown ones – they’re only making the types of loans that are most readily saleable. I like the above analogy because most folks want a silver Honda Accord anyways – so the changes below will only affect a small percentage of potential homebuyers. Nonetheless, it’s important to be aware of how the mortgage world is moving.
Here are some of the changes:
- Higher risk Government loans (FHA and VA loans) are subject to additional scrutiny. Traditionally, Government loans have had higher rates of default as they are designed to lend to more “at-risk” borrowers. Banks that service these loans are required to pay the investors that hold them, even if the borrowers are not paying. This has led to some banks requiring minimum 680 credit scores and/or lower debt to income ratios.
- “Jumbo” loans are very difficult to find or much more expensive. In the Portland market, these are loans larger than $510,400 (the “Conforming” limit). Because these loans are sold in the open market or held by the bank that opens them, there are no guaranteed buyers. Additionally, these larger loans tend to create more losses in a downturn as higher cost properties typically suffer disproportionately when home values fall.
- Because the mortgage market is so volatile right now, some lenders are not allowing interest rate lock extensions or making them extremely expensive. If you’re buying a home in this environment, it’s important to have extra time on your interest rate lock as all aspects of the home buying process are taking longer.
- More “overlays” in general – mortgage loan underwriting rules are written to address “most” situations. We are in a unique time and lenders are adding additional approval criteria. This could include:
- Using two years of tax returns for self-employed income calculation instead of the most recent year
- Requiring additional funds in reserve – three to six months’ mortgage payments left over after bringing in the money to close
- Looking at the type of industries the borrowers work in (hospitality, entertainment, etc) to see if they are at higher risk of closing.
- Reverifying employment multiple times throughout the loan process, including the day of closing and asking very specific questions about how Covid-19 is affecting the employee’s number of hours worked and overall pay.
These changes are having some effect on new mortgage applications. We’re seeing a general slowdown in preapprovals. First time homebuyer applications are still strong, but buyers with a home to sell or who might be purchasing homes at the higher end of the spectrum are applying in smaller numbers. For those who elect to proceed, good financing is still available at low interest rates. The above changes will not affect most homebuyers. The Fed has been stepping in and buying mortgage loans under $510,400 (“Conforming” mortgages underwritten to Fannie Mae or Freddie Mac guidelines). These types of loans make up the majority of mortgages issued and having a back-up buyer makes banks more willing to fund these types of loans. For buyers looking to borrow more than $510,400, lenders are using a Conforming first mortgage and a second mortgage in conjunction, in lieu of one “Jumbo” loan. The mortgage business is adapting and evolving in this environment, just like other industries. More changes are likely to come as the economy gyrates and it’s never been more important to have an experienced REALTOR® and loan originator to help get you to closing smoothly.
Contact Aaron Nawrocki HERE if you have any questions, or mortgage needs.
About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.