Apr 13, 2020

The mortgage industry, like the real estate industry, is dealing with a plethora of new processes and guidelines in the wake of COVID-19.  There is also a ton of misinformation out there.  Let's talk about what's not exactly true first.  And then I'll share the best way to navigate these treacherous waters.

NOT TRUE:  A lot of lenders have gone out of business.
Yes, the mortgage industry is facing challenges related to government mandated forbearance, servicing runoff, and capacity issues.  I've written about some of these challenges in previous weeks.

That being said, with the exception of non-QM lenders, I'm not aware of any mortgage companies who have gone out of business as a result of COVID-19.  Not one.  It's possible that some companies could shutter in the coming weeks or months.  But it hasn't happened yet.

NOT TRUE:  You should request a 60-day closing because it's taking so long to get appraisals.
Appraisals are actually getting easier.  Several weeks ago, Fannie Mae and Freddie Mac announced they will now accept drive-by/exterior-only appraisals for most purchase transactions.  FHA and USDA followed suit.  VA is leaving it up to the individual appraiser. 

And it's made the process faster.  I'm finding that most exterior-only appraisals are being delivered within two weeks.  And no risk of work orders!

In fact, fewer purchase transactions overall equals better turn times.  We're prioritizing purchase business.  We've improved pricing on purchase transactions.  And purchases jump to the front of the underwriting line.  My purchase transactions are currently taking about three weeks to get closing documents to escrow.

NOT TRUE:  The mortgage industry is on the brink of collapse.
Remember, the media is trying to sell newspapers/advertising/clicks.  And consumers love to click on sensationalist headlines.

It's definitely not a boring time to work in mortgage or real estate!  But this is not 2008.  This began as a health crisis, not an economic crisis.  The economy was much stronger going into the coronavirus than it was going into the Great Recession.  Homeowners have record amounts of equity.

Some mortgage companies may close their doors.  And the industry may look very different a year from now than it does today.  But the entire industry is by no means on the verge of ruin.

Now, for the truth.

TRUE:  Some lenders are tightening their guidelines.
Some lenders are tightening their belts by requiring higher credit scores and larger down payments.  And some mortgage programs disappeared virtually overnight.

Not surprisingly, non-QM loans were the first to go.  When lenders are worried about borrowers making their mortgage payments, it's no surprise that higher risk programs would be the first on the chopping block.

Jumbo loans (loan amounts above $510,400 in most markets) were quick to follow.  Many non-QM lenders also provide jumbo loans.  When those non-QM lenders disappeared, they took their jumbo products with them.

Renovation loans also vanished.  Who wants to originate a renovation loan when we're not allowed to hire a contractor to renovate?  (We are still allowing escrow holdbacks.)

Some lenders have stopped originating government loans or have increased minimum credit score requirements for govies.  It's all about risk.  For the week ending, 04/10/2020, 4.25% of Ginnie Mae (government) home loans were in forbearance compared to just 1.68% of Fannie/Freddie mortgages.

Chart:  Home Loans in Forbearance as Percent of Servicing Portfolio Volume
Source: https://www.mba.org/news-research-and-resources/research-and-economics/chart-of-the-week

In addition, many state bond programs have been abandoned and down payment assistance programs decimated.  These are risky, but not for the reason you might think.  State bond/DPA programs are serviced by external servicing companies.  Buyers utilizing DPA programs don't make their payments to New American Funding.  Or to Bank of America.  Or to whoever originated the loan.

These loans are serviced by outside companies selected (in our case) by the Washington State Housing Finance Commission.  And it takes time for servicing to be transferred - often a couple months.  If the borrower loses their job during that period and requests forbearance, the servicer can decline to purchase the loan.  So some lenders have eliminated DPA programs altogether.

We're still able to originate DPA programs in Washington, albeit with a few minor stipulations.

TRUE:  Some leders are keeping interest rates unnecessarily high.
I'll be the first one to tell you that for most mortgage loans, under normal circumstances, individual banks and mortgage companies don't determine interest rates.  The market does.  But these are not normal circumstances.

Different banks and mortgage companies will experience this crisis differently.  How well are companies able to handle increased capacity?  How much liquidity do they have?  How much of their portfolio is FHA vs Fannie/Freddie?  Do they service their loans?  Do they sell directly to Fannie/Freddie (and therefore only adhere to Fannie/Freddie rules)?  Or are they mortgage brokers or correspondent lenders and therefore subject to the rules of external parties?

The answer to all of those questions (and more) will determine how different mortgage companies respond to this crisis and establish interest rates every day.

THE MORAL OF THE STORY:  It pays to shop around.
Now, more than ever, it pays to shop around.  Align yourself with a loan officer who understand how the markets (and interest rates) are behaving and why.  And work with a lender with a demonstrated ability to close home loans in your neighborhood.

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