With the democratic government taking the lead, many changes have been incorporated in the commercial real estate lending market. The new eviction laws have let millions of borrowers to delete their monthly payments. Thus we can see that the commercial lenders are starting to tighten the screws on commercial lending altogether.
Although it is evident that the mortgage rates are at their lowest, we can see that the borrowers who can take advantage of this are very low in number due to the strictest loan approval standards. Real estate experts believe that the loan approval standards present in the current market scenario have been the highest for over many years now.
Over the past month alone, commercial lenders have placed the highest credit score and down payment requirements. The high down payment requirements mean that only those with high capital can take these loans, although the loan rates are lower than the average.
Thus, commercial lenders will favor only those borrowers who have excellent credit scores and can meet the strictest loan requirement standards. Additionally, certain types of loans are stopped from being issued altogether, in effect shutting down a large swath of the mortgage market.
One of the most important reasons behind such increased lending requirement standards is that commercial lenders are becoming more risk-averse than ever before due to the COVID-19 outbreak.
Adding to this was the win of Congress, allowing millions of borrowers to defer their monthly payments. The mortgage giants like Fannie Mae and Freddie Mac also implemented many policies that have tightened the overall lending requirement standards.
In essence, it can be concluded that with the new lending requirement standards, some people are just not going to get any mortgage, and the people who can manage to get a mortgage have to pay a lot higher price than they used to before.
The rock bottoming loan rates might be tempting. However, the high lending requirements will compensate for the advantage. Only those with a fantastic credit score and previous lending history will be able to take advantage of such a situation.
How Low is the Big Giants Going?
To name a few, here’s a look at a few big lending giants and how low they are going:
Lending giant Wells Fargo & Co. increased their minimum credit score to 680. This credit score is for government loans that they buy from small lenders before aggregating them into more significant mortgage bonds.
On the other hand, JP Morgan Chase and Co. also tightened their lending standards last month, requiring them to have a minimum credit score of 700. Additionally, they also require borrowers to make down payments of 20 percent of the home prices on most mortgages. These standards are also applicable to refinance mortgages.
Additionally, the option of refinancing the mortgage while cashing out home equity is no longer available under Wells Fargo programs. JP Morgan Chase and Wells Fargo both suspended new home equity lines of credit. There are barely any lending giants now who are favoring the cash-out refinance programs for Jumbo loans.
The traditional Banks have also revised their loan requirement standards. The typical minimum score of 580, which was applicable for banks, is not available anymore, and the borrowers are required to maintain a score far above a minimum of 580. For the home buying programs supported by the federal government, traditional banks require a down payment of at least 3.5 %.
The Refinance Hesitancy
Wells Fargo recently quoted a refinance rate of 4% for a 13-year fixed-rate loan, which is more than half a percentage point higher than it would have been if it was used to buy a home.
Thus, it is very evident that lending giants and banks alike have become refinance hesitantly. The chances of getting a refinance mortgage are very low even if you have a great credit score.
A Wells Fargo spokesperson said that the company had suspended the home equity line of credit in response to the uncertainty surrounding the US economy’s recovery.
It goes unsaid that a lot of other private lenders and lending giants are following a similar approach and are saying no to refinance loans altogether.
Further, even banks are trying to limit their regular finances. Thus, unless you have a very great credit score, these are some of the hardest times to get the market’s best loan.
The Fannie-Freddie Policies
Real estate experts believe that the tighter underwriting and lending requirements are partly in response to the policies that were put forward by Fannie and Freddie, which makes it all the more expensive or risky to make certain kinds of mortgages.
One such instance is when Fannie and Freddie said they would buy mortgages where the borrower had entered a forbearance. This further limited many commercial lenders to issue such high-risk products.
In essence, the government, together with Fannie and Freddie agencies, set standards for the mortgages they are willing to back. Any loan that is outside the scope of such classified loan programs will not be backed.
For instance, the Federal Housing Administration will insure loans where the borrower has a minimum credit score of 580. For such instances, the down payment goes as high as 3.5 % of the property value.
It must be noted that the mortgage lenders sometimes set their lending standards with strict requirements, even when they want to sell these loans later to Fannie or Freddie.
And on the other hand, Fannie and Freddie, which have been under government control ever since the 2008 housing crash, always buy mortgages from lenders and pack them into trillions of dollars of bonds with guarantees, thus protecting investors against the risk of defaulting borrowers.
The mortgage credit availability has fallen to 25% since the month of February. One of the major reasons for this is that the government does not support the loans in the wake of the COVID-19 situation and the shaken economy.
Furthermore, the mortgages backed by Fannie and Freddie and other Federal agencies in April showed the highest credit standards that similar loans have had from the past five years.
The Rising Forbearance
With the new eviction laws, it is clear that more and more borrowers are delaying their mortgage payments to the best extent possible. Although it must be noted that these will eventually get reimbursed, the mortgage lenders will still be required to advance these missed payments to the bond investors.
This is one of the biggest reasons lenders are less eager to offer loans to borrowers who might undergo a forbearance. Thus, the consumers who have low credit scores and who can only afford minimum down payments are not some of the best borrowers to choose for lenders at present.
The Peril of Commercial Lenders
It is evident that most of the commercial real estate lenders, big and small alike, have put restrictions in place in response to the $2.2 trillion stimulus bill that lawmakers passed in the month of March.
The new law requires lenders to let borrowers who have government-guaranteed mortgages to delay their years’ worth of payments if the coronavirus impacted them. Many real estate experts believe that this law favors the borrowers and the renters, as opposed to the lenders and the homeowners.
The government is seen as solving unemployment and the shaken economy by treating the effect rather than the cause. Many experts opine that the government must try to create more jobs, rather than allowing such waivers and delays on loan payments. How this plays out is something that we should wait and watch.