Mortgage lenders are tightening standards as coronavirus crisis worsens

Origination overlays become the new norm for mortgage lenders

Update April 3, 2020 5:41 p.m.

Union Home Mortgage

To accommodate the current disruption in the market, Union Home Mortgage modified its re-verification process and other overlays.

  • Age of documents: The age of document requirements have been reduced from four months to two months for most income and asset documentation.
  • Verbal re-verification of employment: When UHM is not able to obtain a standard verbal verification of employment, the lender can accept an email sent from the employer’s work address, year-to-date pay stubs from the pay period that immediately precedes the note date or an asset account statement evidencing the payroll deposit from the pay period that immediately precedes the note date.

Story published Friday, April 3.

As market volatility increases due to the coronavirus pandemic, mortgage lenders are increasingly tightening their lending standards to add in increased protections against borrower default.

Specifically, many lenders are adding overlays to their origination process. Overlays are new lending policies that dictate new standards for certain mortgages, such as raising the minimum FICO credit score to quality for a Federal Housing Administration loan.

These changes come as it becomes more difficult for lenders to check the borrower’s ability to repay their loan as unemployment surges and data is updating and changing daily due to COVID-19.

A total of 6.65 million people filed jobless claims in the week ended March 28, the Labor Department said on Thursday. That’s up from the prior record of 3.31 million for the previous week, which was revised upward.

Because of this, United Wholesale Mortgage added an extra verification of employment check on the day of closing. And other lenders have stepped up to add what UWM CEO Mat Ishbia called, “prudent lending standards that might become the new norm.”

Caliber Home Loans

Due to the ongoing impact of COVID-19 causing volatility in the markets and difficulties in underwriting credit risk, Caliber released several overlays for its conventional, jumbo and government products, including:

  • Age of documentation: Effective with submission dates on or after April 3, 2020, the age of documentation requirements is being reduced. Income and asset documentation must be dated within two months (60 days). If an asset account is reported on a quarterly basis, the most recently issued quarterly statement must be obtained.
  • Verbal VOE: All verbal VOEs must be completed and be done within three business days of the note date, validate the borrower is currently employed and not on leave or furlough, confirm that the borrower’s hours and pay have not been impacted in the last 30 days and be completed by an HR representative, owner or digital vendor.

For those that are self-employed, the borrower must provide a written statement that the business is open and operational and that the COVID-19 effects will not have a material impact on the financial statement provided at time of approval. If bank statements are unable to be obtained, then the qualifying income must be reduced by 25% and be deemed acceptable to move forward.

  • Rental income: Rental income may only be used if the borrower’s FICO is greater than 700 and the borrower can document six months of reserves for each financed property in which rental income is being used to qualify. If the FICO and reserve requirements are not met, then the borrower must qualify with the full PITIA for the subject and other REO properties owned.

Arc Home

Arc Home also announced new overlays due to the ramifications from COVID-19, which it noted in a letter to brokers.

  • VOE: A verification of employment within 10 days of closing in the form of verbal confirmation, an e-mail directly from the employer’s work e-mail address that identifies they are someone who is authorized to provide the Borrower’s employment status (Human Resources or Immediate Supervisor) as well as the borrower’s name and current employment status; year-to-date paystub from the pay period that immediately precedes the Note Date; or an asset account statement, meeting Fannie Mae and Freddie Mac documentation guidelines, evidencing the payroll deposit from the pay period that immediately precedes the Note Date.
  • Self-employment: For self-employed borrowers, verification that the Borrower’s business is operational should be obtained within 15 days of the Note Date.

Parkside Lending

Parkside Lending announced that, in light of businesses closing and others working remote, it is implementing several updates to its validation staff when verifying employment.

VOE: If no one answers and their voicemail states they are close due to coronavirus, the lender will reach out to the broker and see if it can get a business email address for a person who can help verify. It will also ask brokers for assistance with a phone number (landline or mobile) to reach the appropriate staff for validation.

U.S. Bank

Effective April 3, 2020, U.S. Bank added several overlays for government loans including FHA, VA and USDA.

  • Minimum FICO: U.S. Bank increased its minimum FICO requirement to 680.
  • Debt-to-income: The bank implemented a maximum DTI of 50%.
  • Underwriting: Manual underwriting is only allowed on FHA streamline refinances and on VA IRRRL transactions.
  • Transaction type: FHA streamline refinance and VA IRRRL transactions is only available if U.S. Bank is the current servicer.
  • Funds for Closing: Borrowers must have a minimum FICO score of 700 with a maximum DTI of 43% when any funds used for closing costs or down payment are not borrower’s own funds or gift funds.

First Community Mortgage

Human Mortgage by First Community Mortgage continues to take measures, including additional overlays, to adapt to the market disruption brought about by the spread of the COVID-19 virus.

  • VOE: FCM is requiring a verification of employment to be completed within three business days on all loan programs. Due diligence should be used in obtaining the most recent income documentation to reverify the borrowers repayment ability prior to closing. When originators are unable to obtain a verbal verification of employment within three business days of loan closing due to a temporary closure of the borrower’s employment, alternatives should be explored. For example, email correspondence with the borrower’s employer is an acceptable alternative to a VVOE. If unable to obtain a VVOE or acceptable alternative, the requirement will be waived when the borrower has a minimum of two months cash reserves.

This is a developing story and is being updated with information and quotes as they come in.

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