As a lender, I’ve been asked more times than I can count how mortgage lending has changed in the wake of the coronavirus. In the early days of COVID, with shelter-in-place starting to take effect, businesses shutting down, and rates dropping rapidly, no one really knew what was going to happen next. Once economists could tell that this was going to have a large impact on employment numbers, naturally, they also knew that meant people wouldn’t be able to pay their mortgage.
Two things weighed heavily on the minds of mortgage CEOs when all of this started:
How many people will stop paying their mortgage as a result of the drop in income?
How many people who recently closed a loan will refinance before making 6 payments?
As such, lenders began changing guidelines to reduce risk due to the chaos surrounding the U.S. economy.
COVID-19 Impact on Lending Industry
First and foremost was the issue of forbearance requests. If a lender closes a loan, and the customer goes into forbearance before they’ve made six payments, this counts as an early payment default, or EPD. The originating lender loses any profit made on that loan and the expenses associated with processing and closing.
If a lender closed a loan where the client went into forbearance prior to making their first payment, not only would the bank lose its revenue on the loan, but there could be a hefty penalty assessed by the FHFA.
And there is an investor buy-back clause applicable to mortgages sold to Fannie Mae and Freddie Mac. If a loan stops performing for any reason before six payments have been made, again, this is known as an EPD. If a mortgage is paid off within the first six payments, called an early pay-off (EPO), the originating bank loses any profit made, including originators’ paid commission.
Lenders are now forced to re-verify employment and income the day of closing. In some cases, this had a negative effect. But it also saved lenders from closing a costly loan.
Keep reading the article “Mortgage Lending During COVID-19: What Homebuyers Need to Know” here:
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