The Federal Reserve is buying up hundreds of billions of dollars of mortgage-backed securities, boosting liquidity for banks and encouraging them to lend more to jumpstart the devastated economy.
But JPMorgan Chase, the nation’s fourth largest home loan provider, is heading in the opposite direction, having just raised its borrowing standards on home loans and suspended home equity line of credit offerings. JPMorgan’s decision to back away from mortgage lending — along with similar moves by other prominent banks — could have dire consequences for the hobbled housing market, industry pros said. Their actions also come at a time when nonbank lenders, which now provide a majority of home loans, don’t have access to Federal Reserve funds and may not be able to absorb a flood of defaults.
“It is going to make a housing crunch that we have not had,” said Ken Thomas, a South Florida independent banking analyst. More plainly,he said, “It is going to hurt the housing market.”
At the very least, JPMorgan’s one-two punch last week will mean getting a mortgage for a new home will become a lot more difficult, further depressing demand. It comes at a time when the coronavirus has led to a rise in mortgage forbearance requests, not to mention the 22 million Americans who have filed for unemployment, grinding the economy down to a virtual standstill.
“One of the most important things for the housing market is going to be liquid financial markets,” said Ralph McLaughlin, chief economist at Haus, a startup that partners with homebuyers to share the cost of owning a home.
JPMorgan’s move appears to run counter to the Federal Reserve’s moves of boosting liquidity at banks in order to promote lending.
Homebuyers seeking a mortgage through JPMorgan must now have a credit score of at least 700 and must put down 20 percent of the total purchase price. The bank said it is shifting focus to refinances, which have taken off amid historically low mortgage rates. JPMorgan last week also said it was “temporarily pausing” its home equity line of credit offering.
“Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers,” the bank’s Chase Home Lending division said in a statement.
Other major loan providers have taken similar actions. US Bank increased its minimum credit score requirement to 680 and Wells Fargo said it was restricting its jumbo loan program. Wells will now only allow customers with at least $250,000 in liquid assets to refinance, according to the Wall Street Journal, a move designed to eliminate all but the wealthiest potential homebuyers.
The U.S.housing market was on relatively solid footing before the crisis, according to McLaughlin. Inventory was low and demand was high. There were few signs of distress.
And while the coronavirus’ tsunami-effect on the economy has upended the housing market, McLaughlin said “we still don’t know how bad it is…We are in the fourth inning of this. There are still a lot of ways that this whole thing can play out.”
Overall mortgages in forbearance rose to 3.74 percent from March 30 to April 5, up from 2.73 percent the previous week, according to the Mortgage Bankers Association. If those numbers continue to rise, they could force additional banks to tighten their lending standards.
Those standards have already increased across the industry, said Joel Kan of the MBA. The group’s Mortgage Credit Availability Index for March highlighted that shift, most of it coming in the final two weeks of the month. “We can expect more of this given the trajectory of the situation in the forecast,” he said.
History repeated?
Since the last recession, many banks have moved away from the residential mortgage space, citing low margins and a need to focus on more profitable lines of business. Nonbank lenders emerged to fill that void and today companies like Quicken Loans, Freedom Mortgage and LoanDepot now originate more than half of all the residential mortgages in the United States, according to the U.S. Treasury Department. Quicken Loans is the biggest home mortgage originator in the country.
But those alternative lenders are now facing growing concerns about their ability to service mortgages. If a loan goes into default, will those nonbanks have enough cash to pay the interest payments? Nonbanks don’t have access to the hundreds of billions of dollars in liquidity that the Federal Reserve can pump into banks. If those alternative lenders get wiped out, it could mean fewer players in the home loan space going forward.
In late March, MBA, the Housing Policy Council and the Structured Finance Association urged federal regulators to provide relief.
“Without some access to liquidity so that they can cover that cost, non-depository mortgage servicers will not have enough liquidity to advance these payments at the extraordinary rate that we are going to need,” the group wrote in its letter that was addressed to the Department of Housing and Urban Development, the Fed, Treasury and other agencies. “That would undermine the relief efforts the federal government has undertaken to encourage mortgage lending, they said, “requiring yet more government intervention.”
But their pleas appear to have fallen on deaf ears. Federal Housing Finance Agency director Mark Calabria said the agency has no plans to provide liquidity through its mortgage agencies Fannie Mae and Freddie Mac to those nonbank lenders.