Hailey Johnson
The COVID-19 pandemic created unprecedented challenges for mortgage servicers, who responded by implementing new laws, regulations, and guidance to assist borrowers. The US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, allowing borrowers to enter forbearance programs and pause mortgage payments. As the pandemic continues to wane, the focus has shifted to evaluating compliance management systems and preparing for the end of COVID-era forbearance programs. Despite the pandemic, the demand for mortgages and refinancing remained high, with historically low-interest rates. However, banks faced challenges in adhering to stricter guidelines, adapting to remote work, and managing backlogs, resulting in stricter underwriting rules and longer processing times. The pandemic also led to increased credit score requirements, additional documentation requests, and challenges in inter-bank processes.
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What You'll Learn
Mortgage forbearance programs
The COVID-19 pandemic created unprecedented challenges for mortgage servicers, who sought to implement various federal and state laws, regulations, and guidance to address these challenges. In response to the pandemic, the US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided borrowers impacted by the pandemic with credit reporting and mortgage-related protections.
The CARES Act allowed millions of mortgage borrowers in the United States to enter public or private forbearance programs and temporarily pause their mortgage payments. Forbearance programs were a vital tool for homeowners during the pandemic, allowing them to manage their mortgage payments during a period of financial hardship. This was a temporary solution for those experiencing short-term financial difficulties, and it's important to note that forbearance doesn't change the interest rate or decrease the amount owed on the mortgage.
During the COVID-19 pandemic, homeowners who qualified for forbearance were able to pause their mortgage payments for six months and request an additional six months if needed. As of early 2024, COVID-era forbearance programs were mostly over, but a significant number of borrowers, approximately 110,000, were still on pause. This extended forbearance period was designed to provide relief to those still struggling to recover financially, even as the pandemic began to wane.
The success of these forbearance programs during the pandemic has led to discussions about their continued use in the future. FHFA Director Sandra L. Thompson acknowledged the effectiveness of the COVID-19 payment deferral and indicated that forbearance would be included in their standard loss mitigation toolkit. This suggests that forbearance could be utilized more broadly in the future to assist borrowers facing financial difficulties due to death, divorce, or job loss, among other hardships.
While forbearance programs have helped many homeowners, it's important to understand the potential risks and challenges associated with them. Homeowners need to be proactive in communicating with their lenders and ensuring they qualify for forbearance before pausing their payments. Additionally, the extended forbearance period can impact the overall interest paid and the amortization schedule. As the pandemic's impact on the housing market begins to ease, mortgage servicers and borrowers will need to work together to navigate the transition out of forbearance and ensure a smooth path to financial recovery.
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Stricter bank guidelines
The COVID-19 pandemic has resulted in banks adhering to stricter guidelines, which, along with the shift to working from home, has caused backlogs and slower closing times. Buyers need to be aware of these stricter underwriting rules, which include increased minimum credit score requirements and the need for private mortgage insurance (PMI) for buyers who put down less than 20%. Previously, buyers who could put 10% down were allowed to forgo PMI on loans under $1 million.
Self-employed borrowers are facing more stringent checks, with many lenders requiring profit and loss statements, documentation of business banking assets, and proof of business income within five days of closing. These borrowers may also need double the reserves they needed before the pandemic, which means having more cash or other investable assets available.
Lenders are also conducting multiple employment checks during the underwriting process, and borrowers must submit employment verification within five days of closing. These stricter guidelines are a result of banks adapting to the new working environment and the increased demand for loans.
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Increased credit score requirements
The COVID-19 pandemic has had a significant impact on the mortgage industry, with lenders tightening their requirements for loan approvals. One notable change is the increase in credit score requirements, making it more challenging for some individuals to qualify for a mortgage.
During the pandemic, many households experienced fluctuations in their financial situation, which were reflected in their credit scores. A CFPB analysis revealed an upward shift in the distribution of credit scores, indicating that mortgage forbearance programmes, federal student loan repayment pauses, and cash transfers contributed to improved financial wellbeing and, consequently, higher credit scores for some individuals.
The improvements in credit scores were most prominent among consumers with deep subprime and subprime credit scores. The share of consumers with prime credit scores who transitioned to superprime increased from 27% before the pandemic to 31% during the pandemic. Additionally, transitions out of the subprime credit score tier became more frequent, with a decrease in the percentage of consumers remaining in the subprime tier or falling to the deep subprime tier after the pandemic.
The impact of these changes is significant because credit scores play a crucial role in lenders' loan decisions and the terms of credit. A higher credit score can provide access to more credit options and potentially lower borrowing costs. However, it is worth noting that even with a higher credit score, the rapidly rising prices for goods, particularly housing, may still pose challenges for individuals seeking mortgages.
While the specific credit score requirements may vary among lenders, the overall trend indicates that lenders are seeking higher credit scores as a result of the pandemic's economic fallout. This shift in credit score requirements has made it more challenging for some borrowers to qualify for mortgages, particularly those with lower credit scores or those who have experienced financial difficulties during the pandemic.
It is important for individuals considering a mortgage to closely monitor their credit score, address any discrepancies, and actively work on improving their creditworthiness. Additionally, staying informed about the evolving loan requirements and seeking professional advice can help individuals navigate the changing landscape of mortgage approvals during and after the COVID-19 pandemic.
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Self-employed borrower challenges
The COVID-19 pandemic made it more challenging for self-employed borrowers to secure home loans. Mortgage lenders became more cautious about lending to self-employed individuals due to the economic uncertainty and the perceived instability of their income. This resulted in self-employed borrowers facing heightened scrutiny and more stringent income verification standards.
Lenders sought to mitigate the risk of lending to self-employed borrowers by requesting more recent and comprehensive documentation to prove their income stability. This included profit-and-loss statements, business deposit account statements, payroll tax filings, Form 1099-MISC, and other documentation of income and expenses. Lenders also assessed the likelihood of continued demand for the borrower's products or services and the impact of state or local stay-at-home orders on their operations and revenue.
Self-employed borrowers were advised to carefully review and discuss the new document requirements with their lenders. They needed to prepare recent financial statements, bank statements, receipts, contracts, and other relevant documentation to meet the higher benchmarks. Additionally, self-employed borrowers could benefit from working with an accountant to maximize potential write-offs and amend previous tax returns to demonstrate higher income.
While the COVID-19 restrictions imposed additional challenges for self-employed borrowers, the Federal Housing Finance Agency (FHFA) eventually lifted these restrictions in February 2022. After this date, self-employed borrowers faced similar eligibility requirements as other borrowers, including credit, debt, and income standards. However, income documentation remained a tricky aspect for self-employed individuals, including consultants, contractors, freelancers, gig economy workers, and business owners.
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Compliance challenges for mortgage servicers
The COVID-19 pandemic created unprecedented operational challenges for mortgage servicers. In response to the pandemic, the US Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allowed millions of mortgage borrowers in the United States to enter forbearance programs and pause their mortgage payments. The CFPB also proposed a set of rule changes intended to help prevent avoidable foreclosures as the federal foreclosure protections expired.
To comply with the new regulations, mortgage servicers had to devote substantial legal, compliance, and training resources. They also had to make significant updates to their compliance management systems (CMS) and the various components that support an effective CMS, including policies, procedures, training, scripting, correspondence, system updates, and vendor management.
The CFPB's new COVID-19 procedural safeguard rules posed significant compliance challenges for mortgage servicers. For example, servicers wishing to take advantage of the procedural safeguard allowing new foreclosure actions against unresponsive borrowers would need to maintain records demonstrating that no contact occurred. This could include call logs, servicing notes, and other systems of record cataloguing communications.
Additionally, the distinction between 120 days and 121 days delinquent had a tangible impact on the loans that a servicer considered eligible for foreclosure. If the loan was due for November 1, 2019, the loan would be 120 days delinquent on February 29, 2020, and the procedural safeguard rules would not apply.
The CFPB also warned mortgage servicers to dedicate resources and staff to prepare for a surge in requests for assistance. The CFPB would be closely monitoring how servicers engage with borrowers, respond to borrower requests, and process applications for loss mitigation. The CFPB encouraged mortgage servicers to enhance outreach to borrowers exiting forbearance and closely monitor data on borrower demographics and outcomes.
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Frequently asked questions
Yes, banks continued to approve mortgages during the COVID-19 pandemic. However, there were stricter guidelines and underwriting rules, and buyers needed to be prepared for backlogs and longer processing times.
Interest rates remained historically low during the pandemic, making it a good time to refinance loans. However, rates did not drop as low as expected, and banks were forced to raise rates due to the high volume of loan applications.
The US federal government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allowed borrowers to enter forbearance programs and pause mortgage payments. This measure ended in early 2024, but some borrowers may continue to receive relief into 2025.
The pandemic resulted in stricter approval requirements, such as increased minimum credit scores and private mortgage insurance needs. Self-employed borrowers also faced additional documentation requirements and higher reserve needs.
Homeowners facing financial hardship due to COVID-19 could contact their mortgage servicer to discuss assistance options. HUD-approved housing counseling agencies also offered free support and tailored action plans to help homeowners work with their mortgage companies.
