Changes ahead

Q: Is there any sign regarding how mortgage applications will change as a result of the coronavirus? A: Funding a mortgage loan — especially a huge loan that’s likely to remain outstanding for many years — requires a careful balance of risk and reward for loan investors. This balance can change quickly based on daily news. Consider the ban on foreclosures and evictions for properties financed with FHA-backed mortgages. According to HUD, “properties secured by FHA-insured Single Family mortgages are subject to a moratorium on foreclosure for a period of 60 days. The moratorium applies to the initiation of foreclosures and to the completion of foreclosures in process. Similarly, evictions of persons from properties secured by FHA-insured Single Family mortgages are also suspended for a period of 60 days.” This may sound like great news for people who have suddenly lost some or all of their income. For investors who rely on interest income, the HUD announcement — and a similar announcement for loans held by Fannie Mae and Freddie Mac — changes the risk/reward balance. Mortgages to investors are now riskier. But — at this writing — apparently not a whole lot riskier. Interest levels for mortgages were generally stable in February and March. Weekly mortgage rates for fixed-rate, 30-year financing looked like this, according to Freddie Mac. • March 26th – 3.50% • March 19th – 3.65% • March 12th – 3.36% • March 5th – 3.29% • February 27th – 3.45% • February 20th – 3.49% • February 13th – 3.47% • February 6th – 3.45% The 3.29% rate seen on March 5th is the lowest weekly mortgage rate for 30-year, fixed-rate loans listed by Freddie Mac since it began keeping records in 1971. What we have not seen to this point is a sudden and large rate hike. The absence of instantlyhigher rates is a good sign, a suggestion that investors have faith in the mortgage marketplace. After the 2006 mortgage meltdown lender standards became enormously tight. Had lenders continued to use the application standards in place during 2001 — a time of “reasonable” understanding requirements — millions of additional loans could have been originated. “It was so hard to get a mortgage in 2015,” said the Urban Institute, “that lenders failed to make about 1.1 million mortgages that they would have made if reasonable lending standards had been in place. From 2009 to 2014, lenders failed to make about 5.2 million mortgages thanks to overly tight credit. In total, lenders would have issued 6.3 million additional mortgages between 2009 and 2015 if lending standards had been more reasonable.” In recent years lender standards have loosened. Maybe too much in some cases. With FHA-backed mortgages, HUD reports that more than 28% of the FHA loans originated in fiscal year (FY) 2019 had debt-toincome (DTI) ratios above 50% — an enormously-high level. Just as concerning, large numbers of recent FHA-backed mortgages have low credit levels with scores at 640 and below. Likely, lenders will now begin to toughen loan standards to reduce risk. Look for stiffer credit score requirements, acceptable debt-to-income ratios closer to 43%, and a greater interest in reserves — savings and other forms of ready cash that can be accessed in the event of an emergency.