Challenges To Homebuyers and Homeowners as Lenders Raise The Credit Bar For Purchases and Refinancing

Fears of rising home foreclosures are causing mortgage firms to toughen their standards.

At the beginning of the year, the share of house owners who were late with their mortgage payments fell to its lowest level in additional than 20 years.

But that was before the COVID-19 pandemic clobbered the U.S. economy and led to quite 20 million job losses.

Now lenders are bracing for an increase in missed loan payments and rising foreclosure rates.

They are already tightening credit standards that make it tougher for people to shop for or refinance a home.

“Home loan delinquency and foreclosure rates were rock bottom during a generation before the COVID-19 pandemic hit,” Dr. Frank Nothaft, chief economist at CoreLogic, said within the firm’s latest mortgage market assessment. 

“Recession-induced job losses will fuel delinquencies.”

Many lenders are offering payment forbearance plans. And therefore the average household was in better shape heading into the pandemic than before the good Recession — factors that make Nothaft optimistic that foreclosures won’t soar.

“Widespread foreclosures across America will likely be averted,” he said

Mortgage firms aren’t taking any chances. They’re raising required credit scores and ramping up requirements to urge a mortgage.

Major U.S. banks are setting aside billions of dollars for what they fear is going to be a flood of loan defaults.

Housing analysts worry that stricter lending standards will slow home sales and make it harder for the residential market to recover when the economy turns back on.

Young buyers with less credit history are going to be particularly hard hit.

 “It may be a concern because the momentum we had within the housing market was coming, in part, from younger prospective homebuyers, like millennials,” said Robert Dietz, chief economist for the National Association of Home Builders. 

“The tightening of the credit box is probably going to stop a number of these potential buyers from the market.

“This not only holds homeownership attainment back, but it’s ripple effects,” he said. “For most of such buyers, they need to be ready to sell their existing range to shop for new construction. 

So a tightening of lending standards can displace sales above on the housing ladder.”

Lenders are raising the credit bar for construction financing, too.

“We are seeing evidence of tightening of lending standards for builders also — that’s, loans for acquiring land and construction purposes,” 

Dietz said. “Builders cannot develop land or build homes without financing, so there’s a supply-side effect also .”

George Ratiu, the senior economist with Realtor.com, agrees that young homebuyers can pay the most important price for the tougher financing standards.

“About 5 million millennials are turning 30 this year, a major age for homebuying,” Ratiu said. 

“With younger buyers saddled with student debt and rising unemployment, tightening standards will likely disqualify many of them from a mortgage, making buying a home away harder proposition.”

He understands why mortgage companies are raising credit standards, with expectations of a recession or maybe an economic depression.

The credit restrictions are coming at a time when the interest rates on home loans are at their lowest level in generations.

“As the outlook for the economy and housing markets darken, lenders are understandably taking steps to preserve liquidity and strengthen portfolios,” Ratiu said.

With the worsening economic environment and sharp declines in home purchases, Zillow economist Skylar Olsen said the mortgage companies are struggling.

“The higher mortgage requirements are another implication of the sheer volume of requests for forbearance and refinance against the problem of assessing creditworthiness in an economic environment of rapid job loss,” Olsen said. 

“I am still confident that the solid housing fundamentals just before this crisis and therefore, the record-setting government support packages will make a difference keep distressed homes out of the market to prop home equity.

“But to the extent that higher credit standards are how of claiming the pipeline is overwhelmed, timing goes to be everything for the more marginal buyers, who need the forbearance, refinance or aid checks yesterday.”

Lawrence Yun, the chief economist with the National Association of Realtors, worries that increased lending hurdles will twiddle my thumbs to the housing market.

“Higher deposit and better credit score requirements will deter home sales bounce when the economy reopens,” Yun said. “The credit standards in situ before the pandemic led to historically low foreclosure rates.”