With banks raising their lending standards due to coronavirus, lower mortgage rates won't spur additional home sales.
U.S. banks are tightening their purse strings as the novel coronavirus pandemic is putting millions out of a job.
If you’re one of those thinking of taking advantage of low mortgage rates to jump into the housing market, be prepared for disappointment. Lenders are becoming risk-averse due to the unprecedented surge in unemployment.
A Bloomberg report points out that U.S. banks have raised credit score and downpayment requirements substantially. JPMorgan requires borrowers to put down at least 20% on a home, along with a minimum credit score of 700. The bank requires customers to pass similar criteria in case of refinancing.
Wells Fargo has also raised the minimum credit score requirement to 680 in the case of government loans. The bank buys these loans from smaller lenders and aggregates them into mortgage bonds. Wells Fargo borrowers cannot refinance their loans. Meanwhile, both JPMorgan and Wells Fargo have stopped taking applications for new home equity lines of credit (HELOCs).
Before the new standards came into play, borrowers were able to make a 3.5% down payment when buying a home through a government-supported program. Their credit score requirement was 580.
In March, riskier borrowers “could get a mortgage but just pay a higher price than other people,” said Michael Neal, a senior research associate at the Urban Institute Housing Finance Policy Center. “Now, some people are just not going to get mortgages.
The tightening of credit standards will sting the housing market during the spring selling season–-which has already been impacted by the COVID-19 outbreak. A model by the Mortgage Bankers Association (MBA) points out that mortgage credit availability in the U.S. plunged by as much as 25% in April.
According to Joel Kan, Associate Vice President of Economic and Industry Forecasting at MBA:
The abrupt weakening of the economy and job market – and the uncertainty in the outlook – drove credit availability down in April for the second consecutive month.
After spiking in March, U.S. mortgage rates have plunged to record lows. Housing market bulls believe that the low mortgage rate environment could spur buying activity. But tight lending standards are likely to put the brakes on home purchases, as evident from the decline in credit availability:
Banks don’t have much leeway under the current scenario as borrowers who have mortgages guaranteed by the government have started delaying repayments amid coronavirus. The problem is that lenders will have to keep paying the delayed payments to bondholders, while an increasing number of borrowers opt for forbearance plans–exacerbating the liquidity crunch.
These challenges are forcing banks to raise their lending standards, which is probably the right move given the record number of job losses in recent months. Since mid-March, 33.3 million Americans have filed for initial unemployment claims, accounting for 20% of the total workforce.
Loose lending standards during such uncertain times could spell bad news for the U.S. housing market. The possibility of borrowers losing their jobs after they take out a mortgage could saddle banks with bad loans and worsen the liquidity crunch. U.S. households are already burdened with record debt of $14.3 trillion, making it an especially risky environment.