The real estate industry is growing alarmed over recent moves to tighten credit standards for new loans to home buyers as banks try to fend off disruption and losses during the COVID-19 pandemic. The National Association of REALTORS® warns that lending standards could grow even more stringent if federal regulators don’t step in soon to alleviate the servicer logjam in lending.
Starting Tuesday, JP Morgan Chase, the nation’s largest lender by assets, announced that the majority of new customers applying for a mortgage will need a minimum credit score of 700 and a down payment of at least 20% of the home’s value.
Over the past two weeks, other banks have enacted stricter eligibility requirements. Some are raising credit score minimums and others are completely halting jumbo mortgages. The tighter standards are making it more difficult for borrowers to take advantage of the lowest mortgage rates in history.
“This will hurt home sales and weigh on the economy if lawmakers don’t act soon,” warns Ken Fears, NAR’s senior policy representative for banks, lending, and housing finance. “We are continuing to put pressure on regulators, and we are engaged in a number of calls to the Treasury to highlight that this isn’t just an issue of servicers but an issue for individuals and home buyers across the country in every market. If [lawmakers] don’t act, this problem on paper will hit main street.”
Banks are responding to the unprecedented, sudden wave of homeowners taking forbearance options to delay their mortgage payments as unemployment skyrockets, with more than 16 million out of work due to the pandemic. Around 2 million borrowers have already applied for forbearance programs as businesses have scale back at the direction of federal guidelines on the critical workforce and social distancing. But banks are still on the hook to make tens of billions of dollars in payments to securities investors even in the absence of those missed payments. This is now spilling over in servicers’ abilities to issue new loans for home purchases.
To prevent this, NAR—joined by other housing trade groups—has been calling on financial regulators to use available money and tools to help fund new loans, including the creation of a liquidity facility set up by the Fed and backed by the U.S. Treasury. The liquidity facility would provide a pool of money that servicers could use to make short-term loans and help ensure the stability of the housing finance market. Further, the Treasury has already provided Fannie Mae and Freddie Mac a $250 billion line of credit that could be used.
“We urge you to use these tools and others at your disposal to maintain market liquidity and support all consumers in these difficult circumstances,” NAR President Vince Malta wrotein a March 27 letter to the Treasury Department.
Refinancing Stabilizes, Home-buying Drives Markets
JP Morgan Chase said it was also motivated to tighten its lending standards in response to the growing number of refinancing requests that it’s been fielding in recent weeks as mortgage rates have dipped to new lows, prompting homeowners to rush in to lower their monthly payments.
But Fears warns that lenders can’t just cater to the refinance market. “Refinances help stabilize homeownership, but home sales help drive the economy,” Fears says. Each existing-home sale creates about $85,000 in economic activity and the category drives nearly 20% of the economy, NAR research shows. “If people can’t continue to buy homes, that can be destabilizing to the economy,” Fears says. “It’s crucial to continue to provide access to credit for home purchases.”