April 11th, 2020
From an economic standpoint, the main question surrounding the spread of the coronavirus is just how long the country will be shut down and just how much damage that shutdown will cause to the economy.
One thing that is clear, however, is that the mortgage lending landscape is vastly different in early April than it was in early March. Certain segments of the business – namely government, non-QM, and jumbo loans – have dried up substantially as lenders pull back from loans that are seen as riskier than GSE loans.
And according to Federal Housing Finance Agency Director Mark Calabria, some of those changes may be sticking around for a while.
“Anybody’s housing price forecast right now should be taken with a grain of salt. And that’s no slight on forecasters,” Calabria told HousingWire this week.
“To me, I don’t see that as a bug. I see it as a feature,” Calabria continued. “We’re really at a point where nobody, there’s a wide range of possible outcomes for the housing market over the next six months. Given that uncertainty, I certainly think it’s appropriate for people to re-examine their underwriting standards.”
And that’s exactly what has already happened over the last few weeks.
The first domino that seemed to fall was non-QM lending. Late last month, many of the biggest lenders specializing in lending to borrowers outside the Qualified Mortgage lending box began pausing their activities due to uncertainty in the market.
Then, the Federal Housing Administration lending environment began to shift with many lenders raising their FHA requirements, thereby limiting the number of borrowers that were able to get an FHA mortgage.
More recently, many lenders have dialed back their jumbo lending as investor interest has dried up. Beyond that, a growing number of lenders are tightening lending standards as a record-breaking number of people are losing their jobs.
The reason for all these changes is the same; there’s far too much uncertainty in the market and lenders are uneasy about lending to borrowers whose credit profile isn’t “perfect.”
That’s much different from what the mortgage market experienced in recent years, with lending to borrowers who don’t fit tightly in the GSE credit box increasing substantially.
According to Calabria, that situation has played out numerous times before.
“This is the case every cycle, where you go a really long time and people convince themselves that, no, there is no more housing cycle and there’s no risk and we can all be highly leveraged,” Calabria said. “That happens every cycle. So, do I expect that kind of behavior to ever truly go away? Probably not.”
But Calabria said that the recent tightening in credit availability is a normal reaction to economic situations like this one.
“Just like you saw a pullback after the last time,” Calabria said. “Certainly, we saw credit standards tightening in 2009 and 2010. In fact, we saw credit standards tighten as early as 2006. So, there was a slow tightening over that time. I think you’ll see this as a reminder that credit risk is an actual thing in the mortgage market.”
As the credit box has slowly expanded in recent years, discussions surrounding changing the federal mortgage standard have also started to bubble up.
Earlier this year, for example, Consumer Financial Protection Bureau Director Kathy Kraninger said the bureau has decided to propose an amendment to the QM Rule that would “move away” from debt-to-income ratio as a factor in mortgage underwriting.
The Ability to Repay/Qualified Mortgage rule requires lenders to verify a borrower’s ability to repay the mortgage before lending them money, including a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43%.
Fannie Mae and Freddie Mac are not bound to this requirement, a condition known as the QM Patch, which stipulates that loans sold to Fannie or Freddie are allowed to exceed the 43% DTI ratio.
Calabria himself previously said that he believes the QM Patch gave the GSEs an unfair advantage because loans sold to them did not have to play by the same rules as loans backed by private capital.
But Calabria said this week that DTI is proving its worth as a piece of the underwriting criteria as this crisis wears on.
“We’ve had some anecdotal conversations, somewhat data-driven with some of the servicers and the predictors of who is taking up forbearance are really closely related to DTI, FICO and these things,” Calabria told HousingWire.
“And even though they’re all borrowers that have been current, unsurprisingly, borrowers who are having the hardest time once they’ve lost their job and making their loans are those who have high DTI,” Calabria continued. “Currently, I think the data we’re seeing, the conversations that we’re having, I think it puts to rest the QM-style arguments that DTI doesn’t matter. That’s not what we’re seeing in forbearance take up.”
Therefore, Calabria said that he doesn’t envision the GSEs moving away from DTI in their underwriting standards.
“QM has always been CFPB’s purview. It’s important to keep in mind that you know, we always look to QM going forward as a floor,” Calabria said.
“During my next four years, we’re certainly not going to be abandoning DTI. I think I’d be the first to say that FICO, LTV are much bigger predictors,” Calabria continued. “But you know, these are the sort of environments where DTI actually matter. I don’t see Fannie and Freddie abandoning DTI. I do see us taking a harder look at what should be the maximum allowable DTI. Fannie and Freddie will always have underwriting that goes beyond QM.”
Overall, Calabria believes that lending standards will change “semi-permanently” coming out of this crisis, with lending standards outside of the GSEs perhaps remaining tighter for some time.
In previous situations like that, the GSEs expanded their portfolios to ensure that people could still buy houses if they wanted to. As for whether that will happen this time around, Calabria said it really depends on just how bad things get.
“I really think we all need to not lose sight of the current situation today. It’s a public health issue. And so, things like driving homeownership or driving purchases, we don’t want to be the facilitator or putting somebody in your house, whether it’s an appraiser or a home inspector or Realtor,” Calabria said.
“There’s an expectation that Fannie, Freddie, everybody else, that some part of that market for the next few weeks is unfortunately, going to take a pause,” Calabria continued.
“Once we’re through that, I certainly could see a month from now, two months from now, if we’re through this public health issue and we’re at a point where the industry has not been able to slowly come back, then yes, I could absolutely see Fannie and Freddie’s market share increased at that time,” Calabria continued. “And that’s appropriate.”
As for the other big topic pertaining to the future of the GSEs, Calabria said he believes both companies are still firmly on the path to exiting conservatorship, but noted that this crisis has likely delayed things a bit.
“It purely is a timeline issue at this point,” Calabria said when asked if anything that’s happened in the last few weeks has altered the plan to get the GSEs out of conservatorship.
Calabria noted that last week the FHFA hired a law firm to help the agency end conservatorship. The law firm in question is Milbank, a New York-based firm which will aid the FHFA in the legal pieces of reprivatizing the GSEs.
As such, Calabria said the process of ending conservatorship is continuing to move forward.
“I always saw that equity raise as a 2021 or 2022 event, not in 2020,” Calabria said. “So, to me, this probably delays things two or three months. But again, that’s with the caveat of our hope and expectation that in six to eight weeks, we’re through the public health crisis. If not, then that’s obviously a different situation.”
Either way, Calabria said that the lending landscape will be different post-crisis from what it was before.