How often are your buyers’ mortgage applications being denied compared to last year?
- More often. (48%, 22 Votes)
- Less often. (37%, 17 Votes)
- The same. (15%, 7 Votes)
Total Voters: 46
After months of tightening credit lines, lenders are gradually beginning to loosen standards.
The Mortgage Bankers Association (MBA) reports their Mortgage Credit Availability Index increased 2% in January 2021 over the previous month. This increase indicates credit availability increased 2% in this single month alone, following an increase in credit availability in three of the last four months. Broken down into mortgage type, mortgage credit availability changed:
- +7.7% for conventional conforming loans;
- +2.2% for conventional jumbo loans; and
- -0.1% for government-backed loans.
Behind the increase in conventional loan availability are more adjustable rate mortgage (ARM) offerings.
ARM use tends to increase in periods of rising mortgage interest rates. In the first weeks of 2021, captured by the MBA report, the average ARM rate was still roughly level with the average 5/1 ARM rate, but that has since changed. In the week ending March 19, 2021, the average 30-year fixed rate mortgage (FRM) rate was 3.09%, while the average 5/1 ARM rate was a full 0.3 percentage points lower, at 2.79%.
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Homebuyers turn to ARMs to increase their purchasing power, as the initial interest rate allows more money to be applied to principal. This allows homebuyers to afford a more expensive home. A quick fix, but not always a smart one, especially for less experienced buyer-occupants.
Lenders look ahead
Early in 2020, when lenders tightened credit, they made it more difficult for buyers to qualify for mortgages. Their reasoning lay in the spiraling economy, which left incomes uncertain. Therefore, only homebuyers with stellar credit and secure sources of income were able to qualify.
In 2021, lenders are seeing a different economic picture forming. While the U.S. is still in a recession, some of the jobs lost have returned, and, at minimum, are no longer being shed at the historic rates of a year ago.
Moreover, mortgage lenders continue to see high demand in the housing market, in spite of the recession. As demand continues to surge in the face of low inventory, home prices have increased rapidly, currently at 10%-12% above a year earlier here in California. These consistent home value increases have given lenders greater confidence to qualify more homebuyers.
However, lenders and other real estate professionals need to continue to watch the economy and housing market for signs of weakness. Today’s rising home prices are not a guarantee in the months ahead. In fact, when the foreclosure moratorium expires — currently scheduled to occur at the end of June 2021 — home values are expected to falter with the wave of distressed sales that follows.
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Further, as the recession lingers and jobs are slow to return, the effects from the most recent government stimulus will gradually diminish.
Many look to the vaccine as the panacea for the pandemic and the recession. But these two phenomena may as well be two ships passing in the night: they are simultaneously unrelated to each other (as the recession had been building for years before it hit in 2020) and yet happened to arrive in the same year. Their meeting caused the pandemic to worsen the initial impacts of the recession, culminating in historic job losses almost overnight. But once the pandemic is no longer a concern on daily life, the economy will still need to deal with the underlying recession.
The course of the next two-to-three years for the economy, and by extension the housing market, will partly depend on the timing and extent of government intervention. Examples include further stimulus, job-creation programs and further extensions of the foreclosure moratorium.
In other words, lenders and other real estate professionals need to stand their guard; the economic recovery is still years away.
