“We’re walking around landmines that have nothing to do with mortgages.”
That’s what one loan officer told me about a week after the Coronavirus completely upended industry, and in effect, every other industry too.
Consider the following:
About a week before mass shutdowns and mass quarantines, mortgage rates in the U.S. dipped fairly dramatically for two or three days. It was enough to create a sudden spike in applications. Mortgage lenders became concerned with their ability to effectively manage the increased volume even before the rising number of confirmed cases of the virus. Some even bumped-up their rates to prevent a further influx of new applications.
And then… things got worse.
During the first week when people started talking about staying away from work, an employee from one big bank told me that the initial plan was to rotate their operations staff weekly, 50% working from home and 50% at the office. Some lenders immediately saw to it that all their processors and underwriters were properly equipped to work from home. Eventually, none of these institutions would have a choice.
The industry’s entire infrastructure, like many others I suppose, was deconstructed and all its parts were scattered about at the same moment it’s supposed to perform at its most optimal level. In a vacuum it’s a difficult task but add panic and anxiety from a legitimate global pandemic and some might suggest its mission impossible.
Aside from communicating and working in parallel when they’re not sitting in the same physical location, these are some of the challenges a mortgage lender’s operations staff will face, perhaps for the first time:
- Appraisers are swamped with orders in connection with refinances loans.
- Nobody wants to let an appraiser into their house because of the coronavirus.
- Appraisers don’t want to go into anyone’s house because of the coronavirus.
- Appraisers are not essential employees, so they can’t go into anyone’s house even if they wanted to and the homeowner didn’t mind the company.
Appraisal waivers have become more prevalent in the last 12 months. In the case of an appraisal waiver, a lender would approve a loan and allow it to close without the need for an appraisal. The determination as to whether an appraisal waiver is in order is typically made by an automated underwriting system – A computer decides if an appraisal is necessary or not. In most cases, the stronger the application, the more likely an appraisal waiver is granted, especially when the loan amount requested is considerably less than its perceived market value.
Some loan officers and processors are more skilled than others at nudging an automated underwriting system in the right direction. They might suggest a slightly larger down payment, or they’ll include additional assets on an application that others might leave off just to streamline the application. A minor detail can sometimes be the difference between getting a waiver and not getting one.
Even the most technically skilled loan officers see fewer than 50% of the applications they take get an appraisal waiver. So, an alternative is in order otherwise there will be a significant number of applications on hold. I heard some buzz about virtual appraisals. I think it’s fair to say that most of the real work that goes into completing an appraisal report happens outside of the property.
An appraiser goes to a home to take measurements and photos, to gauge condition and take not of amenities and to determine that there is nothing out of the ordinary that would impact the property’s value. After that though, there’s research – which properties that have sold recently are the most comparable? What are the differences between those properties and the subject property? What do recorded sales records look like? There’s math – price per square foot/appropriate adjustments to account for discrepancies with comparable properties.
Since so much of the vital information that helps to formulate an opinion of value can be done outside the home, and since interior and exterior photographs are readily available for virtually every home in the country already, it wouldn’t surprise me to see lenders allow borrowers to send specific photos of their property to an appraiser in an attempt to account for property condition.
Verification of employment
For some mortgage applications, a lender might require a borrower’s employer to complete a written verification of employment that might clarify the method in which the employee is compensated. And, in almost every mortgage application a lender will conduct a verbal verification of employment within 10 days of a closing to make sure the loan applicant still holds the job they listed on their application.
Schools are shut down. Many places of business are shut down or they’re running on skeleton crews. Who will verify employment for these applicants? And unfortunately, some people have already lost their jobs due to the impact of the virus and others will lose their jobs in the not-too-distant future. If an applicant loses their job while their mortgage application is in process, it could obviously put any approval in doubt. A lender will want to know that someone still has a job and still has the ability to repay the money they’re attempting to borrow.
A title search includes many different reports. One that’s vital is a Municipal Report, that would tell a lender and a mortgagee if there were any liens or judgements or violations against the property. If municipalities closed, it will be extremely difficult to obtain a municipal report.
Rate Questions and Rate Lock Questions
People hear about Fed rate cuts and assume they can lock in their mortgage rates to zero percent (see last week’s Mortgage Minute). So, it’s not surprising that loan officers’ phones are ringing off the hook. It’s been well over a year since I jumped away from the mortgage industry and over to real estate, and I’ve gotten more than a dozen calls or texts like that in March. Loan officers are doing everything they can behind the scenes to help their operations staff get the applications through the process during very challenging times. But they’re pulled in a lot of directions handling calls from their panicked clients and from shoppers who think they can refi down to zero.
No doubt, time in process is going to be stretched-out. Most lenders lock into a rate for about 60 days. In New York City, lenders account for board meetings and other outside factors and they typically offer 90 days or even 120 without charging an additional fee. But, it’s reasonable to think that given the circumstances, an application might take longer than 120 days to process. Lenders will likely have to offer to extend rates at no cost to a borrower, something that certainly comes at a cost to a mortgage lender.
Mortgage Payment Moratorium
There are problems the industry is dealing with right now, and as they peel back the layers, they’ll discover new challenges that weren’t on their radar just a few days ago. For instance, banks and mortgage servicers in many instances are allowing customers to defer payments for 30-90 days and they’ve vowed not to report any of these payments as late payments. Individuals facing a financial hardship might take advantage of that option, and it’s not a stretch to believe that a higher percentage of people might also skip their monthly maintenance fees or common charges.
Fannie Mae, Freddie Mae and many lender’s portfolio guidelines have a threshold for the percentage of unit owners in the building that can be late on their maintenance or common charge bill. Typically, that threshold is set at 15%. Beyond that and a lender might decline a high-risk building. It’s yet to be determined if the mortgage industry will be more forgiving on this when we finally crawl out of this mess.
Closings During Lockdowns and Social Distancing
At most closings, there are more than a handful of people sitting in a fairly confined space. So, how do we have closings?
The industry is scrambling for solutions, and it’s vowing to get loans closed. New solutions are being presented every day, like notaries signing via video conference and the aforementioned appraisal waivers and virtual appraisals.