Navigating the New Mortgage Normal
As you’ve undoubtedly heard, mortgage rates are near record lows, averaging just 3.228% APR on a 30-year fixed mortgage as of June 10th 2020. Unfortunately for would-be homebuyers and owners attempting a refinance, these attractive loans are getting harder and harder to come by.
The impact of the COVID-19 pandemic has been far reaching. The economic devastation unleashed by the crisis and subsequent lock-downs has led to the loss of some 22 million jobs in April and May. Understandably, many of the newly unemployed are unable to make their mortgage payments and on June 1 the Mortgage Bankers Association announced that over 4.2 million homeowners are in forbearance. That is 8.46% of all home loans - it's a staggering number.
In the past two months major banks have announced stricter requirements for credit scores, down payments, and how they verify income and employment. In many cases banks are turning down applications for all but the most well qualified prospects.
J.P. Morgan Chase, one of the nation’s largest mortgage lenders, now requires a credit score of 700 or higher, as well as at least 20% down for most new mortgages. Bank of America and Wells Fargo raised their minimum credit score for home equity borrowing to 720 from 660 and 680 respectively. Wells Fargo has also stopped offering some non-conforming* loans and all cash-out refinancing, which is a popular tool among our cash-buyers in New York City. (Paying cash gives you greater leverage in negotiations and allows for a faster closing. After closing the buyer can turn around and use a cash-out refinancing to take their equity back out of the property and put it to use elsewhere.) Some banks are taking the unprecedented step of requiring the borrower’s employment status to be reverified on the day of closing to ensure that the borrower has not lost their job since receiving their loan approval.
Why are banks making these changes?
Simply put, there’s more that happens behind the scenes. With most large banks loans are often “repackaged” or sold to another investor or entity. Some of these entities include Fannie Mae and Freddie Mac. Both of these companies are actually publicly traded and not Government owned like many would believe, though post 2008 they are under government control. The easy way to differentiate between the two is to remember that Fannie Mae = buyer of loans from large/commercial banks, whereas Freddie Mac = buyer of loans from smaller or “thrift” banks.
Banks repackage their loans as a means of increasing liquidity and maximizing profits. Now, a savvy customer might ask “why would a “Big Bank” implement stricter requirements than those advertised or required by Fannie, Freddie, and FHA (Federal Housing Administration)?” Considering that these loans are “repackaged” into trillions of dollars worth of bonds that rely on timely repayment (otherwise they fall into default), many large banks are acting with a higher abundance of caution and austerity to mitigate the chances of another 2008 style mortgage market collapse. This has all resulted in a marketplace where mortgage credit availability has been slashed by 26% as of May, 2020, and lending institutions have implemented the toughest credit terms for loans in five years.
While these measures are a prudent approach from the large banking institutions in efforts to avoid mistakes made in years past thereby promoting an overall healthier economy, if you’re in the midst of securing a mortgage, refinancing, or line of credit on your home, this is not ideal.
Now, let’s say you are trying to get a mortgage but don’t quite meet the new requirements. All hope is not lost.
A number of mortgage lenders we're working with are still making these loans, but to go this route a borrower should expect to receive a rate .5% to 1.5% above the prevailing market rates. These lenders typically do their own underwriting of loans (not actually done by all banks), do not lend with the intent to repackage, or offer loans backed by private investors. Admittedly, the borrowers will be paying a premium for initiating a loan through one of these lenders, but it affords the opportunity to secure a compelling property deal or still save on an otherwise higher existing mortgage.
Does this mean that everyone who applies will be able to secure a loan through these lenders?
These lenders will still thoroughly vet the intended borrower. However, a potential borrower with a low likelihood of default/non-payment, who may not be your ideal candidate, still has a chance.
Since we are not in the business of marketing for lenders, more so seeking to inform our readers and clients of their options, we have refrained from positioning any specific alternative lender/s. Instead, we’d suggest that if you are “loan shopping” right now:
1. Make sure to get at least two quotes. One from your primary banking relationship and the other from a direct lender (preferably does their own underwriting).
2. Ask the loan officer/agent. Does this bank/lender do their own underwriting, will my loan be “repackaged”, and all factors used to determine initiation (not just pre approval or commitment letter) to assure the loan is granted.
3. Determine all loan initiation contingency language (understand what could stop the loan at goal line)
4. Request clarity on all fees/costs and loan terms up front
In closing, these are just a few suggestions to help ensure that you get your loan, get the right, lender, and the right terms. It’s a lot to consider. As stated in our last article, this is why it's so important to select the right real estate agent to not only consult with but help quarterback this part of the process as well.
Disclaimer: This article is meant strictly for informative purposes only. For a more detailed discussion of any part of the topics covered please feel free to reach out to the authors Andrew Warren and Jules Garcia.
*Non-conforming mortgage loan: United States term for a residential mortgage that does not conform to the loan purchasing guidelines like Including minimum credit score requirements (generally 620 FICO), set by the Federal National Mortgage Association /Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac)
Conforming loans: mortgages that conform to financing limits set by the Federal Housing Finance Agency (FHFA) + meet underwriting guidelines set by Fannie Mae and Freddie Mac, whereas nonconforming loans do not. Fannie Mae and Freddie Mac are the government-sponsored entities that buy conforming loans
Conforming loan limit: the dollar cap on the size of a mortgage Freddie Mac and Fannie Mae are willing to buy or guarantee.