Housing MarketMortgageOrigination

Mortgage catch-22: Interest rates are lower than ever, but millions of borrowers can’t get a loan

Brutal combination of factors is leaving borrowers behind

Despite the fact that mortgage rates have been at or near record lows for more than a month, millions of potential borrowers are facing a situation where it’s simultaneously never been a better time to buy a home and never been harder to get a mortgage; a true mortgage catch-22.

Ironically, the cause of both the record low interest rates and certain borrowers’ powerlessness to take advantage of those rates is the same thing: the coronavirus.

Even as the impact of COVID-19 has driven mortgage rates down, the virus has also crippled the U.S. economy, sent unemployment skyrocketing, and altered the mortgage lending landscape so deeply that it may take years to recover.

That’s leading to millions of would-be borrowers being left behind thanks to a brutal combination of factors that’s making it nearly impossible for them to get a loan, even if they want and could get one otherwise.

Before the coronavirus truly took hold in the U.S., the interest rate for a 30-year fixed-rate mortgage had never been below 3.31%. But as February turned to March, global economic uncertainty drove those rates below 3.3% for the first time ever.

And while rates briefly pushed back up above 3.5% in mid-March, rates recently fell back to new record lows, hitting 3.23% in the week ending April 30, 2020.

But as those rates fell, making getting a mortgage a more enticing option for people, it also became much harder for certain people to get a loan.

As the virus crisis worsened, numerous lenders raised their lending standards, thereby limiting the types of borrowers they’d lend to, because they were trying to protect against lending to borrowers who were either about to or just had lost their jobs.

The immediate impact was felt in the segments of the lending business that are not the pristine borrowers whose mortgages are typically sold to Fannie Mae and Freddie Mac. Very suddenly, lending to borrowers who are viewed as “riskier” dried up significantly.

Case in point: numerous mortgage companies that focused on lending to borrowers outside the Qualified Mortgage box halted their lending operations. Many lenders also dialed back their jumbo lending as investor interest dried up.

Beyond that, it became considerably more difficult for some borrowers to get a Federal Housing Administration loan. It wasn’t because of any government actions though. Instead, many mortgage lenders increased their minimum FICO scores for FHA loans to as high as 660, which would prevent a large section of borrowers from accessing an FHA loan.

But the changes weren’t limited to smaller companies or nonbank lenders.

It also got much harder to get a mortgage at some of the nation’s biggest banks.

About a month ago, JPMorgan Chase raised its minimum lending standards to require that nearly all borrowers have at least 20% down in order to buy a home. Beyond that, Chase also increased its minimum FICO credit score to 700 on purchase mortgages.

Wells Fargo also raised some of its lending standards in April, temporarily suspending the purchase of non-conforming mortgages from correspondent sellers and scaling back retail originations of non-conforming refinances and conforming high-balance loans.

Both Wells Fargo and Chase also recently stopped accepting applications for new home equity lines of credit, limiting the borrowing options of people who already have a mortgage.

The decline in the availability of mortgage credit was clearly seen in the most recent data from the Mortgage Bankers Association, which showed that it hasn’t been this hard to get a mortgage for more than five years.

The MBA report showed that the availability of mortgage credit is now at its lowest level since December 2014, with the decline spreading across all segments of the lending ecosystem.

“The abrupt weakening of the economy and job market – and the uncertainty in the outlook – drove credit availability down in April for the second consecutive month,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, said last week.

“The overall index fell to its lowest level since December 2014, and the sub-indexes pointed to tightened credit supply for all loan types,” Kan continued. “The decline was largely driven by lenders dropping many low credit score and high-LTV programs, as well as further reduction in jumbo and non-QM products.” 

David Stevens, the former FHA Commissioner and former CEO of the MBA, called the situation around mortgage credit recently an “unprecedented” one.

Here’s how Stevens described it in a recent Pulse piece here on HousingWire:

Overnight we saw a series of overlays come into the market broadly. These included 700 FICO floors in some cases, 80% LTV maximums, the elimination of bond lending, DPA, high balance conforming, jumbo non agency, non-QM and more. This was bad, and lenders were trying to respond to the barrage of new underwriting and pricing policies they were receiving, but unfortunately it only got worse.

But it wasn’t just lenders’ new standards that made it more difficult to get a mortgage. At the same time, tens of millions of people lost their jobs, swiftly eliminating them from being able to qualify for a mortgage, even under less strict standards.

The most recent data from the Labor Department showed that the unemployment rate hit 14.7% in April, which is the highest that figure has been since the Great Depression.

That report followed seven straight weeks of millions of people filing for unemployment, with the most recent report showing that approximately 33.5 million people have lost their jobs during the coronavirus pandemic.

The impact of the virus isn’t only being felt on the lending side. Real estate is feeling the effects too.

A report from realtor.com last week showed that new home listings fell by more than 44% in April, as states’ shutdowns limited both homeowners’ desire to sell their home and their ability to do so.

The most recent pending home sales data from the National Association of Realtors also showed just how much of a slowdown there’s been in home sales.

According to the NAR report, pending home sales fell 21% in March. And that figure will probably look positively rosy once April’s data is released, given that shutdowns didn’t begin in earnest until midway through March.

Perhaps the best indicator of the impact of the virus on both sides of the housing market is mortgage application data. Applying for a mortgage is the first tangible step that many prospective homebuyers take and that data serves as a solid indicator about the health of the housing market.

Put simply, when more people are applying for a mortgage, more people are trying to buy a home. And the opposite is true as well.

The most recent mortgage application data shows that despite a recent increase, purchase mortgage applications are running roughly 20% behind where they were last year, despite the fact that mortgage rates were almost one full percentage point higher back then.

That decrease is seen in Fannie Mae’s recently published housing forecast for the rest of 2020. Fannie Mae is now expecting $1.1 trillion in purchase mortgage originations, down from last year’s $1.284 trillion.

The decrease is currently expected to be focused on the second and third quarters, each of which is projected to be down by approximately $90 billion over last year.

Combine that $180 billion in missing mortgages with an expected decline of $29 billion in the fourth quarter and there will be nearly $210 billion less in purchase mortgages in 2020 than there were in 2019.

And while $210 billion may not seem like a big number compared to more than $2.5 trillion in overall projected originations, divide that figure by $300,000 per loan and you’re left with approximately 700,000 people who could have bought a home last year but can’t this year.

That’s a lot of people who would be trying to buy a house right now if they could.

The lending environment has eased a bit in recent weeks with some lenders removing their overlays and others dipping their toes back into nearly dormant markets, but things are nowhere near where they were just a few months ago.

Fannie Mae’s data shows a projected uptick in home sales in the third and fourth quarters, as the GSE’s economists seem to think that the effects of the virus will dissipate later in the year.

But what if they don’t? What if there’s a second wave of infections as states begin to reopen? What if there’s a second round of shutdowns, perhaps even more draconian than the first go-round?

That will make even the most pessimistic of predictions seem optimistic in hindsight. And if that happens, even more people will be left out of the mortgage market than are right now.

In the immortal words of Samuel L. Jackson’s character in Jurassic Park, everybody hold on to your butts.

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