COVID-19 is making its way around not just people, but the economy, too. While we are all well aware of how it has impacted millions of businesses around the country, what’s not so obvious, yet just as devastating, is the damage it’s causing the mortgage industry—in particular, government lending programs, such as Federal Housing Authority and Veterans’ Administration loans.
You may find that it’s much harder to get loans that were once the easiest to qualify for in the market. Government-backed loans have more flexible guidelines, making it easy for first-time homebuyers, people with less than perfect credit, borrowers with little to no down payment and veterans to get the financing they need. This may not be the case during the COVID-19 pandemic, though.
FHA and VA loans are normally flexible and forgiving when it comes to credit scores and debt ratios, but not in the face of COVID-19. While the official guidelines of FHA and VA have yet to change, lenders are doing a quick about-face on their minimum credit score requirements. As more people lose their jobs or have their pay cut, lenders face the risk of more foreclosures. Lenders and investors buying the mortgages don’t want to take that chance.
You’ve probably also noticed the higher interest rates that are uncharacteristic of loans like FHA and VA loans. It’s all in the face of lenders bracing themselves. They are trying to avoid another housing crisis like we experienced in 2008. With higher credit score requirements or higher tiered interest rates that make some loans literally unaffordable, lenders offset the risk of lending to a borrower who may or may not be able to follow through on their mortgage long-term.
Initially, the Federal Reserve stepped in and made millions of dollars in purchases of mortgage-backed securities. Their initial plan was to buy $200 billion in government-backed MBSs, but they’ve quickly moved to an open-ended purchase: $250 billion was purchased at the end of March with the promise to keep purchasing as needed.
While these actions may have temporarily helped the market, they are quickly backfiring. They have caused a huge wave of margin calls, which puts the industry at risk. As MBS prices fall while mortgage interest rates rise, lenders are put in a fickle situation. Lenders still have to offer the lower interest rates that borrowers locked in, yet they can’t sell on the secondary market for that same price.
The result is mortgage chaos. Lenders have to exercise extreme caution when writing government-backed loans during COVID-19. With stricter requirements, they can slow down the origination of new loans, which helps offset the risk of what’s happening in the secondary market. Lenders don’t want to face even more loss than they’re at risk of facing with the rash of foreclosures that seems imminent, so they are offsetting it with stricter requirements and higher rates.
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