Tightening mortgage market threatens economic recovery

The Federal Reserve’s move to cut interest rates to near zero in mid-March was expected to give the housing market a much-needed boost. But things may not work that way.

The $2 trillion CARES Act, which allowed homeowners with loans backed by government agencies to request forbearance for up to a year, has had unintended consequences for the mortgage industry’s complex ecosystem, the Wall Street Journal reported. That may hamper the post-coronavirus economic recovery.

Major banks have moved to tighten standards on home loans, and the market for unconventional home loans has largely dried up. Although low interest rates had earlier led to expectations of a surge in mortgage lending, the volume of mortgage refinancings has not risen significantly — although loan applications for new home purchases have continued to rise.

Furthermore, mortgage rates are about one percentage point higher than expected given current Treasury-bond yields, another reflection of tightening in the mortgage market.

“It was a quick reaction to try to help people, but there are some serious negative effects that weren’t contemplated until just now,” Ian McDonald, a Fairway branch manager in Minnesota, told the Journal regarding the Cares Act.

McDonald is working with a client who’s homebuying plans were disrupted after he agreed to seek forbearance but backed out before missing any payments, leaving a negative mark on his credit report. Homebuyers with credit scores above 800 have also run into unprecedented hurdles due to tightened lender standards.

The Federal Housing Finance Agency has defended its policy moves. “Lenders’ lines of credit would have tightened and borrowers’ ability to get mortgages would have suffered” if it hadn’t acted, agency spokesman Raphael Williams told the Journal. [WSJ] — Kevin Sun