Economists and housing experts say mortgage lending standards will likely loosen in 2021, despite the increased risk of delinquencies ahead.
Such a scenario illustrates the growing disparities in the U.S. housing market. As one struggling group of homeowners braces for the end of forbearance and navigates COVID-19-related economic shocks, another segment is better positioned than ever to scoop up properties that become available.
If this happens, it would prove a dramatic contrast to that of the financial crisis, in which lenders tightened credit standards from 2007 through 2010, said Curt Long, National Association of Federally-Insured Credit Unions chief economist and vice president of research.
“Nevertheless, the fact that high-income households have fared so much better than low-income ones over the past year means that there may still be a lack of access to credit for low-income households even if underwriting standards do ease somewhat this year,” Long said.
The speculation about easing credit standards comes on the heels of the Federal Reserve’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices, which concludes that banks began easing lending standards at the end of 2020. The survey also states that banks expect to continue easing standards as risks lessen.
“Major net shares of banks that reported expecting to ease standards cited an expected improvement in credit quality of the loan portfolio and an expected increase in risk tolerance as important reasons for the expected easing in lending standards,” the Fed’s survey said.
As the economy reopens and the COVID-19 vaccine beats back the threat of the virus, economists expect this loosening of credit will only increase consumer demand for loans, including mortgages. Over the pandemic, a record number of U.S. households reduced their debt loads, giving them a better shot at a new mortgage.
“With household balance sheets generally in good shape, loan demand is likely to pick up again as the economy reopens, and the good news is that most banks expect to continue relaxing consumer credit standards over the course of this year,” Capital Economics Senior U.S. Economist Andrew Hunter said. “That provides another reason to expect consumption growth to rebound strongly as the virus is brought under control.”
Credit standards tightened throughout the year last year. JPMorgan Chase tightened mortgage terms on jumbo loans for co-operatives and condominiums in Manhattan amid shrinking buyer demand. And last spring, the bank tightened its standards by increasing overlays for borrowers applying for a new mortgage, saying they would need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value.
Other banks and lenders also tightened their standards last spring including Union Home Mortgage, United Wholesale Mortgage, Caliber Home Loans, Arc Home, Parkside Lending, U.S. Bank and First Community Mortgage.
What’s more, lending in the non-Qualified Mortgage space, which was supposed to take off in 2020, dried up completely as lenders halted their non-QM offerings amid the pandemic’s onset.
Most lenders, however, have returned to the non-QM market and are forecasting an uptick in growth in 2021. Even the big banks have reduced the amount cash they’d kept on the books to insulate against COVID-related defaults, suggesting they might loosen standards in the coming year.
If economists are correct and mortgage rates begin their steady rise in 2021, the easing of credit standards could help keep demand for mortgages high. Economists across the housing industry believe the era of extreme low rates could be coming to a close, but the transition might be slow.
Tech leads the way
Increased adoption of digital technology should contribute to looser credit standards in 2021.
Over the past year, the use of eNotes registered on the Mortgage Electronic Registration Systems increased a full 261% year over year in December 2020.
This occurred as a larger pool of lenders and even government agencies begin accepting eClosings. In December, Rocket Mortgage became the first lender to use eNotes in closing a Ginnie Mae-backed loan as part of a pilot program. Observers say the market is set to see widespread eClosings of Ginnie Mae loans by the end of this year.
With Ginnie Mae on board with eClosings, this could encourage more lenders to participate in Federal Housing Administration loans, which have typically been more labor-intensive and costly to originate than conventional loans.
Under former President Donald Trump’s administration, the FHA began a multi-year effort to modernize its systems. In October, the FHA announced the launch of its first automated underwriting system, which will allow lenders to submit loan application data electronically for single family forward mortgages from their loan origination systems to FHA for mortgage insurance eligibility.
“It is modernization of the entire process,” FHA Commissioner Dana Wade said at the time. “Modernization means fewer hassles for lenders and potential homeowners and it translates into more efficiency in the origination process. We are looking to build upon that to have a robust ability to analyze data so that FHA can make better decisions for the taxpayer, for the industry and the stability of the marketplace and ultimately for homebuyers.”
Ginnie Mae saw similar modernization efforts.
“We believe as lenders who participate government mortgage programs increase their use of digital mortgages and economies of scale emerge, the cost to originate and service a mortgage will decline,” a Ginnie Mae spokesperson told HousingWire.
Ed DeMarco, Housing Policy Council president and former Federal Housing Finance Agency director, says he hopes this momentum to modernize the process will continue under the new administration.
“We’re actually starting to see the fruits of that modernization effort in the marketplace,” DeMarco told HousingWire. “But there’s still a lot of work to do.”
“I think the benefit of doing that is the new administration is clearly going to be focused on affordable housing,” DeMarco continued. “Getting FHA and Ginnie Mae modernized and improving some of the operational parameters of their programs will make the FHA program in particular more attractive to lenders, making it more efficient and effective to participate in the program…And those things combined will actually make the program less costly and more attractive and available to homebuyers.”
Origination costs drive lending standards
This reduction in cost for FHA or Ginnie Mae loans will be critical for lenders looking to pare back their origination costs, which have continued to rise over the past few years as hiring increased.
Driven by historic volume, mortgage origination profits rose to a record-high in the third quarter of last year, according to the latest IMB Production Profits report from the Mortgage Bankers Association. Production profits rose to 200 basis points in the third quarter. It was the first time that had happened since the MBA’s report debuted in 2008.
“Production expenses usually drop with increased volume, as fixed costs are spread over more loans,” said Marina Walsh, MBA vice president of industry analysis. “But in the third quarter, costs rose despite the volume increase. One major reason for this increase was escalating personnel costs, including signing bonuses, incentives, overtime and commissions that were pushed higher with the need and competition for workforce talent.”
Total loan production expenses – commissions, compensation, occupancy, equipment and other production expenses and corporate allocations – increased to $7,452 per loan in the third quarter, up from $7,138 per loan in the second quarter. Since the third quarter of 2008, loan production expenses have averaged $6,566 per loan.
Has there been any analysis on how the appraisal process will impact the new efficiency provided by the enote process?