COVID-19 and new home loans

 If you've bought a home in the past 20 years, you know there is an unbelievable amount of paperwork.  And for every law suit, example of fraud or other malfeasance, new forms come along.  Over time some are incorporated into boiler plate while others stand alone.

Making loans during the pandemic has got to be challenging.  Early on, lenders started verifying a borrowers employment multiple times; some even asking about the borrowers future prospects of employment.  This seems like a stretch to me.  Asking employers to predict the future at such an unknown time.  

As our COVID economy has "matured" borrowers with existing home loans have had some protection from foreclosure through forbearance arrangements.  With proper paperwork, homeowners can miss payments without triggering a credit issue nor foreclosure.  Different lenders have and enforce different versions of forbearance.  Some loans were put in forbearance even if the borrower didn't ask, same with some student loans.

Lenders making new home loans are challenged to tell which borrowers will be able to pay loans back and which could quickly go into forbearance.  Plenty of borrowers are behind in payments, but this is not reflected in their credit reports. 

So...its time for another form!  This form asks borrowers to commit that they don't expect changes to their income.  Some even have the threat of penalties, should the certification from the borrower prove to be false.  Ack.   

Fannie Mae and Freddie Mac, who provide government backing of home loans are buying back loans in forbearance with a penalty to the lender of 5-7%.  The Federal Housing Administration (FHA) is backing loans in forbearance, but will charge the lender hefty (20%ish) fee if the loans go into foreclosure.  

With such penalties in place, it is understandable lenders are casting about for a way to mitigate their risk. While low interest rates have borrowers flocking to both new home loans and refinances, the credit market is slowly tightening.   The pool of borrowers eligible to take advantage of low rates will continue to shrink as the general credit market tightens and verification of credit worthiness is muddled by forbearance protections.

As with many things COVID, mortgage lending will continue changing (tightening?) as long as COVID is with us.  Some of these changes may stick around longer than COVID.