Mortgage rates are at record lows, but borrowers hoping to take advantage are running into the toughest loan-approval standards in years, Bloomberg [1]reports
The triggers, industry executives say, include lenders becoming risk-averse during the coronavirus crisis, knock-on effects of Congress allowing millions of borrowers to delay their monthly payments, and policies implemented amid the pandemic by mortgage giants Fannie Mae [2] and Freddie Mac [3]. The impact has been dramatic, with one model [4] showing mortgage credit availability has plunged by more than 25% since the U.S. outbreak of the virus.
In March, riskier borrowers “could get a mortgage but just pay a higher price than other people,” said Michael Neal, a senior research associate at the Urban Institute Housing Finance Policy Center. “Now, some people are just not going to get mortgages.”
JPMorgan Chase & Co. [5] tightened its standards last month, requiring borrowers to have minimum credit scores of 700 and to make down payments of 20% of the home price on most mortgages, including refinances if the bank didn’t already manage the loan.
Wells Fargo & Co. [6] increased its minimum credit score to 680 for government loans that it buys from smaller lenders before aggregating them into mortgage bonds.
In the secondary market, industry executives say the tighter underwriting is partly in response to policies put in place by Fannie and Freddie that make it expensive or risky to make certain kinds of mortgages. For instance, Fannie and Freddie said last month they would buy mortgages where the borrower had already entered forbearance.
However, mortgage-finance companies excluded cash-out refinances. Mortgage Bankers Association Chief Economist Michael Fratantoni said that prompted many lenders to limit issuance of those products.
Fannie, Freddie and government agencies such as the Federal Housing Administration [7] set standards for the mortgages they’re willing to back. For example, the FHA will insure loans where the borrower has a credit score of as low as 580 with a 3.5% down payment.