A great deal has changed in the mortgage industry over the past two weeks as the industry responds to COVID-19 economic concerns. Real estate agents and consumers need to be aware of the changes as they navigate the current residential real estate market.
The mortgage industry is facing a severe liquidity problem. Investors stopped purchasing Mortgage-Backed Securities (MBS). The Federal Reserve stepped in and began purchasing some MBS offerings but is limiting it purchases to true conforming Fannie Mae and Freddie Mac packages. There are no high balance securities being sold. There are no non-conforming or jumbo securities being sold and there are no Ginnie Mae (VA and FHA) securities being sold. When the mortgage industry cannot sell its MBS, there is limited cash available to make loans to consumers, evidenced by current rate and point structures. Generally, true conforming loans (< $510,401) are available in the low 3 percentiles at zero points for borrowers with good credit.
By contrast, high balance and jumbo loans are in the low 4’s. VA loans are approximately 4.500% with zero points at the lower loan amounts and with 2.000 discount points on loans over $510,400. FHA loans below $510K are at 4.500% with 3.000 discount points and generally not available at the higher loan amounts.
In addition to rate/point increases, the past two weeks have seen underwriting guidelines tighten significantly. Across the industry minimum credit scores for all loan programs are being raised and minimum down payments for larger loans are being increased. Where jumbo loans are still available, minimum borrower reserve requirements are being increased and income standards are being tightened. Maximum debt-to-income levels are being lowered across the board and it is generally more difficult for consumers to qualify for mortgage financing.
Mortgage Insurance companies are also tightening their underwriting requirements and have increased mortgage insurance premiums.
On the positive side, both Fannie and Freddie began accepting exterior only and “desktop” appraisals for most scenarios. VA and FHA announced this week they are following suit.
Our industry is beginning to work with the settlement industry to allow for hybrid electronic settlements, limiting those documents which must be “wet signed” to just a handful of the settlement documents.
Undoubtedly some consumers will decide now is not the time to sell or purchase a home. Others will recognize that this may be a great time to enter the market. For sellers, inventory is still low. For buyers, they may be competing against fewer fellow purchasers. As I always told my boys when they were standing at the plate, you cannot hit if you don’t swing.
Agents, buyers and sellers need to keep several things in mind. The mortgage process for the next month or so will take a little longer than usual until the refinance loans already in the pipeline are cleared out. The appraisal process where interior inspections are required will take longer and will require coordination between sellers and appraisers for safe practices. More than ever, borrowers need to be truly approved for financing before writing contracts. In some instances, after being preliminarily approved, buyers will lose employment and or income prior to settlement and will end up being denied for financing. Financing contingencies must remain in place from contract to settlement.
As the nation and the world work through the virus crisis and our economy stabilizes, the mortgage industry will stabilize, as well.
— Brian Bonnet, “The state of the mortgage industry during COVID-19,” McEnearney Associates blog