Lenders tighten mortgage requirements
By Jon Chavez / The Blade
Wed, 20 May 2020 13:00:00 GMT
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Add buying a home to the list of activities that have been disrupted or curtailed by the coronavirus pandemic.
In mid-March several lenders, still nursing scars from the Great Recession of 2008-09, began tightening their lending criteria and affecting the ability of some borrowers to qualify for loans or in the case of those pre-approved for loans, to retain that pre-approved status.
“Probably the last six weeks or so a lot of the lenders have been tightening their requirements. And that’s across the board,” said Dave Browning, a veteran Toledo area Realtor and head of Howard Hanna Real Estate’s North Toledo office.
“We had a sales meeting (Tuesday) and our person from Howard Hanna Lending reiterated the same thing,” Mr. Browning said. “I spoke to an agent that said they were working with a gentleman who had a pre-approval letter from a lender. The lender told him ‘This is good for right now, but don’t wait 90 days to buy a house because your requirements might tighten up between now and then,” he added.
Such changes undeniably are being prompted by business shutdowns in March and April across the country, including Ohio, that has left 23.1 million Americans out of work. In Ohio, nearly 323,000 are jobless.
In some cases, lenders are raising FICO scores to get a loan, raising down payment requirements, or requiring proof of employment just minutes before signing closing documents.
For example, on April 13 JPMorgan Chase announced it was increasing its minimum lending standards to require nearly all borrowers to have a down payment of at least 20 percent to receive a home loan. Beyond that, Chase also raised its minimum FICO credit score to 700 on purchase mortgages.
If a borrower couldn’t provide a 20 percent down payment and a FICO score of 700 or above they would be unlikely to get approved for a home loan. Chase said the new lending standards also applied to refinances on non-Chase mortgages.
United Wholesale Mortgage, the second-biggest mortgage lender in the U.S., said it would now require re-verification of a borrower’s employment on the day their loan closes — a move intended to ensure the borrower had not been laid off in the interim.
“If people don’t have a job, I’m not going to put them in a bad position,” United Wholesale Mortgage CEO Mat Ishbia told his employees. “By doing this, we’re protecting borrowers, the company, and the country.”
Even secondary market lenders Fannie Mae and Freddie Mac changed requirements so that a borrower's documents verifying his or her income and other aspects can be no older than 60 days from the date of the mortgage note. Previously, documents had a 90-day window.
The Toledo area market has not escaped the changes.
“It’s hit here already. It is the most non-homogeneous mess imaginable. Lenders are all over the board with this,” said Marty Bihn, branch manager at Fairway Independent Mortgage Lending’s office in Sylvania.
“Chase started last month with a 700 minimum score and 20 percent down. So basically, rather than waiting for the big shoe to drop like in ‘09, they got ahead of it,” he added.
The real issue, Mr. Bihn said, is what happens when a loan goes into forbearance — suspension of payments.
Right now, under the new CARES Act a homeowner with a federally-backed mortgage can request that their mortgage payments be temporarily suspended up to 360 days if they have been harmed economically by the pandemic.
Lenders don’t want to be in a position to grant too much forbearance, so the way to prevent that is not to take on risky loans, Mr. Bihn said.
After the last recession, “Housing prices suffered, neighborhoods suffered. It’s only in the last two years that we have just now caught back up. Do we want to repeat that?” Mr. Bihn said.
“There are people applying for loans who aren’t laid off when you approve them but who are laid off when they close,” he added. “...We don’t want to put people in harm's way. That was a lesson from last time.”
Mr. Bihn said he believes “it’s prudent to pull back some. I’m not saying all lenders have reacted appropriately to this, but the lending industry has started to adapt.”
Just last week both Fannie Mae and Freddie Mac announced updated guidelines for forbearance — under a new option, once a borrower is able to start making payments again their missed payments are added to the end of their loan.
Mr. Browning said he understands that when the economy becomes restricted, it’s only natural that lenders would want to tighten their borrowing requirements somewhat.
But there has been some overreaction, he added.
“I’ve seen ‘em just 24 hours from the closing table. They get laid off and — boom. They lose their approval. Now if they get recalled to work they can be re-examined, but in one case they had been pre-approved and everything just came to a screeching halt,” Mr. Browning said.
“I’ve been selling homes for 46 years. I haven’t seen anything like this before,” he said.