The Federal Reserve is buying up hundreds of billions of dollars in mortgage-backed securities, increasing the liquidity of banks and encouraging them to lend more to fuel the devastated economy.
But JPMorgan Chase, the country’s fourth largest home loan company, is going in the opposite direction and has just got his Borrowing Standards for home loans and suspended home equity line of credit of Loan offers. JPMorgan’s decision to withdraw from mortgage loans – along with similar moves by other prominent banks – could have dire consequences for the limping housing market, industry experts said. Their actions also come at a time when non-bank lenders, who now provide the bulk of home loans, have no access to Federal Reserve funds and may not be able to absorb a deluge of defaults.
“It’s going to cause a real estate crisis that we haven’t had before,” said Ken Thomas, an independent South Florida banking analyst. He said even more clearly: “It will damage the housing market.”
At least JPMorgan’s one-two punch last week means one Mortgage for a new home becomes much more difficult, which further depresses demand. It comes at a time when the coronavirus has caused a surge in mortgage deferral applications, not to mention the 22 million Americans who have registered unemployed and virtually brought the economy to a standstill.
“One of the most important things for the housing market will be liquid financial markets,” said Ralph McLaughlin, chief economist at Haus, a startup that works with home buyers to share the cost of owning a home.
JPMorgan’s move appears to contradict efforts by the Federal Reserve to increase bank liquidity to encourage lending.
Home buyers looking to take out a mortgage through JPMorgan must now have a minimum credit score of 700 and pay 20 percent of the total purchase price. The bank said it was shifting its focus to refinancing amid the historically low mortgage rates. JPMorgan also said last week that it is “temporarily” suspending its home bond line of credit.
“Due to economic uncertainty, we are making temporary changes that will allow us to focus more on serving our existing customers,” the bank’s Chase Home Lending Division said in a statement.
Other major loan providers have taken similar steps. The US bank raised its minimum credit requirements to 680 and Wells Fargo said it was curtailing its jumbo loan program. Wells will only allow clients with at least $ 250,000 in cash to refinance, according to the Wall Street Journal, a move that aims to eliminate all but the richest potential homebuyers.
The US housing market was relative firm stand before the crisis, said McLaughlin. The inventory was low and the demand was high. There were few signs of distress.
And while the tsunami effect of the coronavirus on the economy has turned the housing market upside down, McLaughlin said, “We still don’t know how bad it is … We’re in the fourth inning of it. There are still many ways in which the whole thing can play out. “
Total mortgage loans rose 3.74 percent from March 30 to April 5, from 2.73 percent the previous week, according to the Mortgage Bankers Association. Should these numbers rise further, they could force more banks to tighten their lending standards.
These standards have already risen across the industry, said Joel Kan of the MBA. The group’s Mortgage Credit Availability Index for March highlighted this shift, which for the most part occurred in the last two weeks of the month. “We can expect more of this given the development of the situation in the forecast,” he said.
Since the last recession, many banks have moved away from residential mortgage lending, citing low margins and the need to focus on more profitable businesses. Non-bank lenders emerged to fill that void, and today companies like Quicken Loans, Freedom Mortgage, and LoanDepot provide more than half of all residential mortgages in the United States, according to the US Treasury Department. Quicken Loans is the largest mortgage loan provider in the country.
However, these alternative lenders are facing increasing concerns about their ability to service mortgages. If a loan defaults, do these non-banks have enough cash to pay the interest payments? Non-banks do not have access to the hundreds of billions of dollars in liquidity that the Federal Reserve can pump into the banks. If these alternate lenders are wiped out, it could mean fewer gamers in the home loan arena going forward.
At the end of March, MBA, the Housing Policy Council, and the Structured Finance Association urged federal regulators to provide relief.
“Without some access to liquidity to cover these costs, mortgage servants without deposit insurance will not have enough liquidity to make these payments at the extraordinary rate we will need,” the group wrote in their letter to the ministry for Housing and Urban Development, the Fed, the Treasury Department, and other agencies. “That would undermine the federal government’s relief efforts to encourage mortgage lending, which” require even more government intervention. “
But their requests seem to have fallen on deaf ears. Mark Calabria, director of the Federal Housing Finance Agency, said the agency has no plans to provide liquidity to these non-bank lenders through its mortgage agencies Fannie Mae and Freddie Mac.