It wasn’t that long ago that the mortgage industry recognized the 10-year anniversary of the end of the financial crisis, highlighting the giant strides the industry has made to protect and support the American dream of homeownership. Now, just a couple years later, the industry is in another make-or-break situation, with many lenders worried about their ability to survive the widespread impact of the COVID-19 pandemic.
Companies are adjusting their lending requirements as fast as governments are changing regulations and updating stay-at-home orders, fueling increased communication as everyone tries to figure out what the steady flow of changes means for them.
To get a reading on how people in the mortgage industry are handling the ever-changing impact of the pandemic, HousingWire surveyed its own LendingLife readers and received dozens of replies on how they’re handling the current lending environment. The answers from these lenders vary drastically from person to person, showing there is no one-size-fits-all solution for getting through this crisis.
However, the impact to originators has some common themes across the lending landscape, including increases in credit score and down payment requirements and the state of government loans versus conforming loans.
When it comes to credit scores, phrases such as overlays “requiring higher down payments and credit scores for purchase loans,” “minimum credit scores increased” and “raising of credit scores and additional layers of due diligence,” were all too common.
Introducing overlays
One Texas-based sales manager stated that his company has taken multiple steps during the coronavirus pandemic, including temporarily raising minimum FICOs on all government loans to 640 and suspending non-traditional credit and all bond and DPA programs. With refinance activity making up around 65% of his business, he added that his biggest challenge right now is consistent pricing availability and underwriting turn times.
Echoing similar challenges, a respondent at a Denver-based brokerage stated he is now having to operate with a limited range of available offerings and overlays that threaten to terminate a borrower who would otherwise be qualified. Despite not having the same range of options available and very long turn times that are putting contracts in jeopardy, he said he is still optimistic that the company’s 2020 production will exceed 2019, with purchase activity making up 60% of their business right now.
Jumbo and VA offerings were also frequently highlighted as areas impacted by the coronavirus and liquidity crisis, with respondents citing that they completely suspended the products and/or they couldn’t find an investor.
For one national bank, the company suspended all agency cash out and VA purchases temporarily, and according to the respondent, while he isn’t experiencing any big challenges originating mortgages in April 2020, he is concerned about May and beyond.
One respondent who works for an independent mortgage bank went so far as to say, “I am having to broker out all of my government right now. I’m okay with FHA but this is BS for our military.”
Refinance vs. purchase mix
The FICO numbers were all over the board, as 640, 720, 640 and 660 were all cited as the new standard, though this does significantly depend on the product, and lately, even the time of day.
For the companies willing to go lower, it can come at a price to the borrower. One Texas-based respondent stated that they raised the minimum score to 620, but pricing below 640 has borrowers paying hefty points at any rate. She added that her business has now flipped to mostly refinance, coming in at 70% of her mortgage mix, whereas she hardly ever did refinance loans prior.
When coronavirus initially started to spread, mortgage refinance applications skyrocketed to levels not seen in a decade. During the second week of March, the Mortgage Bankers Association reported that refinance applications surged 79%, reaching the highest level since April 2009. Compared to a year ago, it increased by 479%.
But this level of refinance activity didn’t stick around, as overlays and liquidity concerns started to sink in. One respondent who is based in Washington said that their biggest challenge originating mortgages in April is “rates that are low enough to lock refinances” and underwriting times for refinances coming in at 12 days versus 2 to 3 for purchase loans, spotlighting the great pricing disparity between purchase and refinance.
A regional bank LO based in Colorado summed up a lot of the feelings in the survey, stating that government program pricing is terrible, as is anything not “vanilla” — great credit, $350K+, and 80% or less LTV.
Business as usual
Even though the words “terrible” and “hurt” were used frequently in answers, there were respondents who said the virus was barely changing their operations at all. Even the Colorado-based regional bank LO said that inconsistent pricing and wide fluctuation in day-to-day in rates were big challenges but things have been improving over the last week.
One reader who works at a national bank said the coronavirus and liquidity crisis haven’t impacted the products they offer borrowers. However, they did list third-party services, such as appraisals and notaries, as the challenges they are facing in originating mortgages in April.
Another Denver-based senior loan officer, who works for the mortgage division of a financial and property services firm, said he’s experienced very little impact on borrower product offerings.
He stated, “My company finally raised our FICO requirements to 620 on FHA and VA in the past week. This isn’t a big deal. Thankfully, we are big enough to sell loans directly to the agencies, as our rates to the agencies are typically at least 1/2% lower than any of our correspondent investors. I have locked over 40 loans in the last four weeks directly with the agencies.”
He also said his biggest challenge right now is not having enough staff to handle the current volume of business, much less any growth in that business. With refinance activity currently making up about 70% of his business, he’s extremely optimistic that his 2020 production will exceed 2019.
Borrower and seller interest
Another common theme in the challenges companies are facing right now revolves around borrowers.
Responses like “lack of interest from buyers that were previously active in the pipeline” and “finding borrowers whose jobs or income are stable” appeared in different ways in answers, as initial reports show that 1 in 5 Americans have lost a job because of COVID-19.
A reader from a Florida-based brokerage gave an in-depth look at the top challenges he is facing, which mirrored many of the sentiments of others.
- Borrowers holding off because they believe both interest rates and prices of homes are going to decrease in the months to come
- Finding lenders that actually are able to close and fund new business and offer competitive pricing
- Speed in processing and closing a loan to meet the real estate agent’s demands to still close loans in 30 days or less
- Borrowers willing to come to closing
- Sellers willing to come to closing
- Trying to not catch the Covid-19 virus
The challenges in uncertainty
And from a respondent at a multinational company and one at an independent mortgage bank, the words “uncertain” and “unknown” appeared in answers, as the changes in the economy, government regulations and lending requirements continue to shift.
While most respondents preferred to remain unnamed for this article, Sean Johnson, a top producing branch manager at loanDepot, freely offered his opinion on the record. “Trust your CEOs. Everyone is making really, really hard decisions right now. No one wants to raise their credit criteria. Nobody wants to do a lot of things they’re doing. This is not what we do as an industry; they’re making sure that we get to the other side of this.
“The hardest part about making those decisions right now is you have to sometimes go a little bit past what you think is right because you don’t know if this is like a 30-day window or 120-day window,” he said. “It’s better to be conservative and make a few people angry and lose some loans, unfortunately. But if you’re not conservative enough, you’re out of business. It’s a real thing, and it’s unfortunate.”
Rather than focus on the things out of their control, when asked what he would tell the industry right now, Johnson said to “just focus on things you can do, which is get up, call your clients, call your real estate agents, set up zoom calls and use technology that you got and do the best you can.”
