Lending standards tighten to mitigate risk, title agents adapt amidst county office shutdowns

Published April 7, 2020
Brendan Phillips
by Brendan Phillips

 Mortgage News: Published by Better April 6, 2020

Here’s a look at the latest developments in the mortgage market for the week beginning 4/6/20.

  • Lenders remain cautious as market volatility continues
  • Servicing rights purchases decrease
  • Economic hardship increases likelihood of default
  • Lenders tighten standards to mitigate risk
  • Title agents struggle to work around county office shutdowns

Drop in servicing rights purchases increases risk for lenders

Over the last decade, non-bank lenders have entered the mortgage industry more than before the financial crisis of 2008; in 2008 they accounted for 24% of loan originations compared to 53% as of 2017.

Due to the risky loans made leading up to the 2007 mortgage crisis, and the corresponding financial crisis in 2008, higher capital regulations were imposed to ensure that banks would have enough money to continue facilitating the flow of credit should such a crisis occur. Those regulations were not, however, imposed on non-bank lenders or mortgage servicers. That's why, with increased risk of borrower default and late payment, many servicers do not have the cash to continue paying mortgage investors (typically through MBS). The Federal Reserve likely has the authority to lend to these servicers, but so far has taken a wait-and-see approach.

Since borrower payments are likely to be reduced due to COVID-19 relief options granted to borrowers, loan servicers are now slowing down the purchase of servicing rights. This increases the risk taken on by lenders who now have to either service the loan themselves or wait longer to sell. Lenders continue raising and lowering rates every day to manage that risk.

As unemployment spikes, lending standards tighten

Another way lenders manage risk is to change the credit standards they lend against. Lenders anticipate the riskiest borrowers may not be able to pay back mortgages if economic conditions persist. 6.65 million people applied for new jobless claims last week, and with overloaded unemployment insurance processing, that number is likely undercounting.

Here’s a sample of what tighter credit standards look like for some lenders:

  • Wells Fargo adjusted its minimum score requirement to 680 for all government loans (FHA, VA, and USDA)
  • US Bank requires a 680 credit score for FHA, VA, and USDA loans, and 640 for conventional loans
  • LoanDepot is requiring a 620 minimum FICO score for VA and FHA loans with a higher score (660+) for cash-out or streamline refinancing
  • Flagstar is requiring a 640 score for both purchase transactions and non-cash out refinances

Even further, some lenders are not allowing borrowers to lock their rates or pushing rate-lock until the loan is cleared to close. This effectively forces borrowers to proceed through the loan process without knowing their rate until days before closing.

As a 100% digital lender, Better Mortgage allows customers to lock rates 24/7. You can get pre-approved, check your custom rates and lock instantly from home anytime.

Title agents struggle to meet demand during lockdown

Title agents, or escrow agents, impacted by coronavirus containment measures now have to work around county office shutdowns to keep closing procedures on track. They’ve turned to remote signing and recordation to smooth bumpy workflows. The American Land and Title Association reports that, as of April 6, only 11.8% of jurisdictions are open and operating as usual whereas 43.1% are operating in a modified state. Although title insurance companies have begun to offer gap insurance, challenges will remain for a business not set up to do all-digital transactions.

Better’s title insurance arm is exploring options for hybrid and remote online notarization options, and there are currently no counties where Better Mortgage cannot fund a loan due to office closures.

Want to see how current events are impacting your mortgage prospects? Get pre-qualified at better.com, check your custom rates, and estimate your monthly savings. If you like what you see, you can lock your rate instantly online.

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