Coronavirus Real Estate Update #3: Mortgage Lending in Crisis

Today there are two updates from the mortgage lending world related to the Coronavirus pandemic: Mortgage lenders are tightening lending rules, as well as a plea by mortgage lenders for regulators to inject liquidity into their business, or for the Federal Reserve Bank to slow its purchase of mortgage bonds to slow margin calls on their hedge positions.

  1. Lending Requirements Tightened: According to Housing Wire, evidence has emerged that several non-bank lenders have tightened their requirements for home-borrowers. This is in response to a higher number of unemployed workers, struggling small business owners and non-payment of rent by a growing number of residential and commercial tenants to property owners. While the tightening criteria vary among lenders, they generally include:
    • Higher minimum FICO scores;
    • Reduced aged of documentation;
    • Verbal Verification of Employment (VOE) within a only few days before closing;
    • Lower debt-to-income ratios;
    • Updated rent rolls; and
    • Refusal to lock loan rates.
  2. Mortgage Servicers Need Liquidity from Regulators: The Mortgage Bankers Association (MBA) reported that a broad coalition of organizations representing financial industry and affordable housing advocates, recently released a statement calling on government regulators to provide a source of liquidity to those mortgage servicers that may need additional capacity to support homeowners and renters impacted by COVID-19.

    Volatility in the mortgage bonds combined with more borrowers unable to obtain financing, created massive margin calls from the broker-dealers, who wrote the hedges, to their mortgage bankers. Some of these mortgage bankers are now facing margin calls of tens of millions of dollars that could drive them out of business.

    In its letter to regulators, the MBA said:  “The dramatic price volatility in the market for agency mortgage-backed securities [MBS] over the past week is leading to broker-dealer margin calls on mortgage lenders’ hedge positions that are unsustainable for many such lenders.” The letter went on to say, “Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.”