Even with historically low interest rates, buying a house or refinancing a mortgage is getting tougher, and some consumer advocates worry that the pandemic fallout could hurt the homeowners with the most to lose.
Some of the nation’s biggest mortgage lenders are making changes that raise the bar for borrowers. As of Tuesday, JPMorgan Chase is raising its borrowing standards for mortgages, requiring a credit score of at least 700 and a 20 percent down payment for most new mortgage originations. Last week, Wells Fargo raised the minimum credit score requirement for home equity lines to 720.
“The large banks, including JPMorgan Chase, are moving significantly to looking at credit risk and looking at loan portfolios where they need to assess potential delinquencies and possible charge-offs,” said Ken Leon, director of equity research at CFRA Research.
Industry data suggests that more lenders could be putting changes like this into practice. According to the Mortgage Bankers Association, mortgage credit availability declined sharply in March. A benchmark index for mortgage credit availability dropped by 16 percent, with availability for all types of loans declining.
“It is a big drop relative to the usual monthly swings,” said Joel Kan, the association’s associate vice president of economic and industry forecasting. “With the weaker economic picture we have [and] the potential for mortgage delinquencies coming, you can see some lending is being pulled back to the more risky borrower and credit profiles.”
Other roadblocks currently make it hard to close on a loan, such as lenders being unable to verify employment or income because the would-be borrower’s employer is closed.
Kan pointed out that there are other roadblocks currently making it hard to close on a loan, as well, such as lenders being unable to verify employment or income because the would-be borrower’s employer is closed or otherwise unreachable, municipal offices being shuttered and appraisers barred by social distancing protocols from visiting homes in person. “It is going to be hard for some people to get a loan or buy a home in the coming months,” he said.
Data from LendingTree shows that new mortgage offers to prospective borrowers with credit scores below 720 dropped by five percentage points between January and March. In that same time frame, mortgage refinance offers dropped by 10 percentage points for prospective borrowers with credit scores below 720. For both groups of customers, the drop accelerated between February and March.
“We’re hearing that lenders are tightening up their standards or putting overlays on mortgages they're willing to fund,” said Barry Zigas, senior fellow and housing expert at the Consumer Federation of America.
Even prior to the widespread economic fallout resulting from the impact of the coronavirus, Zigas said that lenders were struggling to process a surge in refinancing activity as homeowners sought to take advantage of lower interest rates. “Lenders were already prioritizing loan production and focusing more on the products with the fewest blemishes and the quickest turnaround time,” he said.
“Right now, there's more demand than supply for new mortgage originations. Almost 95 percent of this is coming from refinancing on existing homes, especially in the last month or so,” Leon said. “If you look at the largest banks, up until this past week or so, they've been very, very active on refinancing.”
This meant that current or prospective homeowners with weaker financial positions were already a lower priority, and the fast-moving collapse in the labor market has exacerbated that to an as-yet-unknown degree, Zigas said.
“Borrowers who have less cash to put down and weaker credit scores are, statistically speaking, viewed as having an elevated risk of delinquency,” he said.
Working-class, lower-income and non-white borrowers are likely to bear the brunt of the fallout, predicted Alys Cohen, an attorney at the National Consumer Law Center. “We may end up seeing a shuttering of credit in communities of color as a result of this crisis, rather than making judgements based on the individual merits of the borrower.”
There are structural reasons why non-white borrowers face a greater challenge in the mortgage market, Zigas said. “They have weaker credit scores for a whole variety of reasons that don't have anything to do with their ability or willingness to repay.”
“This preemptive narrowing of the credit box excludes people who might be able to qualify. And the people they are excluding are the people who historically have found it the most difficult to get a loan, and to get a fair loan,” Cohen said. “It’s a serious concern.”