Chris is an independent mortgage broker in the Bay Area serving all of California. He’s back in our show for the second time to talk more about the lending industry. In this episode, he shares with us the changes that have happened due to the COVID-19 crisis.
Since COVID-19 struck, the marketplace has been conservative. This affected hard money loans and non-qualified loans. The trend now is toward loans backed by the full faith and credit of the U.S. government.
The mortgage credit availability index which reflects how hard or easy it is to get a loan, dropped 40%.
JPMorgan Chase Bank increased its lending standards. You need a 700 FICO score and 20% down payment. This basically cuts off first-time home buyers.
It seems that with forbearance, people didn’t think of everything through just to get the legislation out as quickly as possible. If someone went into forbearance and weren’t making their payments, the lender will still be on the hook to forward the payments to the bondholders even when they weren’t receiving payments from the borrower.
This is leading to a liquidity crisis. The natural conclusion would be the 401Ks and retirement accounts get plundered because they are the bondholders. Basically, people with retirement accounts will bail out those that don’t.
The way the system works is that Fannie Mae or Freddie Mac owns the loans being serviced by banks like JPMorgan Chase. They package the loans into a giant portfolio being bought and sold on Wall Street. The people who buy them get a guarantee that they will get the payments even if the individual borrowers don’t pay.
This works perfectly fine if we only have 2-3% of borrowers defaulting. But when so many people aren’t making payments, the system can’t take it.
Big banks like JPMorgan Chase have other sources of revenue other than mortgages, so they can choose to be more conservative. A mortgage bank that has no other source of business is stuck navigating the current waters.
Now, big banks demand to see your liquid net worth for the loan amount.
Your FICO score won’t be affected if you took forbearance. But the forbearance is not a protected class, so your credit report will still show your forbearance.
Also, down the road when you refinance again, creditors are within their rights to discriminate against you whether or not you took forbearance. Creditors can decide to jack your rate up or decline your loan.
At the end of the forbearance period, borrowers are expected to make a balloon payment of the last 4 months. While the government allows borrowers to get a loan monitor, they will have to call in and negotiate with loan servicers. What would happen is that they would get stuck for hours calling in the loan servicers’ call centers and end up talking with someone who probably doesn’t even have much mortgage industry experience.
A loan mod is something that you and your creditor will come to agree with. A common solution is to add payments at the end of the term.
In many cases, creditors, loan servicers or banks proactively initiate loan mods, so it doesn’t come out as a black mark on your credit.
People are still out there buying and selling with realtors doing virtual tours. There has been lesser inventory as sellers pulled out their houses and wait out the pandemic.
There is less demand, but there is also less supply. Because of that, there hasn’t been any sharp decrease in prices.
Most of the buyers in the Bay Area work in the tech industry, which didn’t really have massive job losses compared with industries employing blue-collar workers.
One-third of renters did not make their full payment on time for April 1st. Estimates say that about half of the renters may not pay their May 1st rent.
Lenders are each handling the current situation differently depending on how risky your loan is and what your interest rate is.
Some lenders won’t count rental income at all even if you show the leases and deposits. They don’t want to take any risks in terms of rental income, but their rates are good.
Other lenders want verification as of the month of the closing. You need to show that you collected your rent payments at the beginning of the month.
Lenders now assume that 25% of your tenants aren’t paying rent. Add that to the 25% vacancy factor they already consider then it potentially kills the deal.
Most property owners wouldn’t know who’s going to pay rent on the 1st of the month, so they’re stuck with 11th-hour loans.
There are also lenders who look for 6 months of reserves before they’re willing to count the rent. Some also refuse to count retirement accounts because of the volatility in the stock market.
Basically, lenders taking in high-risk loans have much higher interest rates. Those who are more conservative have better rates.
For owner-occupied, single-family houses, rates are really low because the government is buying back mortgage-backed securities.
But for everything else, rates have all gone up.
Because of the layoffs happening, lenders have tightened their employment verification period. Borrowers are expected to prove that they’re still employed as of the day they are closing on the loan.
This means that employees need to talk with their HR departments and make sure they can get that last-minute verification needed or else they might not be able to close on the property.
Some lenders do last-minute verifications directly to the employers because some borrowers didn’t even know they had been laid off.
There have been other changes happening. Before, the first thing mortgage brokers consider were the rates being offered. Now, the first question they ask is whether the lender is going to get it done given the unique particulars of the borrower’s case.
The Federal Housing Administration (FHA) put a limit on the payments loan servicers are responsible for. If the forbearance goes past 4 months, the loan servicer won’t need to make the payments for more than 4 months.
But, lenders have started to limit cash-out refinances because those loans are still expected to afford payments even if they aren’t receiving them for more than 4 months.
If the lenders can’t make payments, then bankruptcy protection comes into place. The worst-case scenario is that some bailout will happen.
In the last 2 months, the federal government has printed $4.2 trillion. After a short-term period of deflation, we might see significant inflation happen in the market.
Lenders are also tightening on home equity lines of credit (HELOCs), so it’s better not to rely on them being available months or years from now.
Creditors will ultimately start taking different approaches. Consumers are now finding it difficult to navigate the lending rules as guideline changes aren’t even being put up. So it’s tougher for consumers to figure out which lender is going to count your bonus income and which ones aren’t.
In general, inflation is good for borrowers but bad for creditors.
Having a mortgage is a hedge against the inflation expected to happen.
A lot of the stuff for the typical first-time homebuyer has not changed. The highest bidder and the strongest offer gets the house.
Before you buy a house, make sure that your job is going to continue so that you’ll be able to make the payments. Being on unemployment doesn’t count.
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