Lenders raise the credit bar for homebuyers and refinance

At the start of the year, the percentage of homeowners who were behind on their mortgage payments fell to its lowest level in more than 20 years.

But that was before the COVID-19 pandemic hit the U.S. economy and caused more than 20 million job losses.

Now lenders are bracing for an increase in defaulted loan payments and higher foreclosure rates.

They are already tightening credit standards that make it harder for people to buy or refinance a home.

“Home loan default and foreclosure rates were the lowest in a generation before the COVID-19 pandemic hit,” said Dr Frank Nothaft, chief economist at CoreLogic, in the latest mortgage market assessment of the society. “Recession-induced job losses will fuel delinquencies.”

Many lenders offer forbearance plans. And the average household was in better shape as the pandemic approached than before the Great Recession – factors that make Nothaft optimistic that foreclosures are not going to skyrocket.

“Widespread seizures across America will likely be avoided,” he said.

Mortgage companies take no risk. They increase the required credit scores and increase the requirements for getting a mortgage.

The big US banks are setting aside billions of dollars for what they fear will be a flood of defaults.

Housing analysts fear that stricter lending standards will slow home sales and make it more difficult for the housing market to recover when the economy recovers.

Young buyers with less credit history will be particularly affected.

“It’s a concern because the momentum we’ve had in the housing market has come, in part, from potential young buyers, such as millennials,” said Robert Dietz, chief economist for the National Association. home builders. “The tightening of the credit box is likely to prevent some of these potential buyers from pulling out of the market.

“It not only slows down homeownership, but it has ripple effects,” he said. “For most of these buyers, they need to be able to sell their existing home in order to purchase new construction. Thus, a tightening of lending standards can move sales higher up the housing ladder. “

Lenders are also raising the credit bar for construction finance.

“We are seeing evidence of tighter lending standards for builders as well – that is, loans for land acquisition and for construction purposes,” Dietz said. “Builders cannot develop land or build houses without financing, so there is also a supply side effect.”

George Ratiu, senior economist at Realtor.com, agrees that younger homebuyers will pay the highest price for tighter financing standards.

“There are roughly 5 million millennials turning 30 this year, a prime age to buy a home,” Ratiu said. “With younger buyers struggling with student debt and rising unemployment, the tightening of standards will likely disqualify them for a mortgage, making buying a home much more difficult.”

He understands why mortgage companies are raising credit standards, with expectations of recession or even economic depression.

Credit crunch comes at a time when mortgage interest rates are at their lowest in generations.

“As the outlook for the economy and real estate markets darkens, lenders are naturally taking steps to preserve liquidity and strengthen portfolios,” Ratiu said.

With the worsening economic environment and the sharp drop in home purchases, Zillow economist Sklar Olsen said mortgage companies were in trouble.

“The higher mortgage requirements are another implication of the sheer volume of forbearance and refinancing applications compared to the difficulty of assessing creditworthiness in an economic environment of rapid job loss,” said Olsen. . “I am still convinced that the strong housing fundamentals just before this crisis and the record government support programs will make a difference in keeping distressed homes out of the market to support home equity.

“But as higher credit standards are one way of saying the pipeline is overwhelmed, timing will be everything for the most marginal buyers, who needed forbearance, refinancing or aid checks yesterday. . “

Lawrence Yun, chief economist for the National Association of Realtors, fears that rising credit barriers are dragging the housing market down.

“A higher down payment and higher credit score requirements will discourage the rebound in home sales when the economy reopens,” Yun said. “The credit standards in place before the pandemic have led to historically low foreclosure rates.”