A recent report from Redfin revealed that, as the coronavirus pandemic continues to ravage the U.S. economy, both low- and high-income house hunters are feeling the pinch of tighter lending standards.
Redfin’s study builds on the most recent iteration of the Mortgage Bankers Association’s (MBA) Mortgage Credit Availability Index, which dropped 16.1% in March to its lowest reading since June 2015. With investors growing more and more selective about purchasing loans, Redfin estimated that 25% of the loans written by its mortgage arm wouldn’t have been possible to originate under the new standards set forth by lenders across the country.
“Thousands of Americans who were priced out of the housing market due to the affordability crisis of the past decade might finally see homeownership as within reach, especially given historically-low mortgage rates,” said Sheharyar Bokhari, chief economist at Redfin. “But unfortunately, they are now faced with another roadblock and may not be able to get a loan.”
Take loans backed by the Federal Housing Administration (FHA), for example. An attractive option for buyers carrying lower credit scores and tighter budgets, Redfin noted that FHA borrowers with FICO scores below 640 are finding it increasingly difficult to get mortgages during the pandemic. Indeed, a Flash Housing Market Indicators report from the American Enterprise Institute found that the share of FHA borrowers with sub-640 FICO scores has been slashed nearly in half from 30% to just 16% in recent weeks. A similar trend holds true when looking at the market as a whole; AEI found that the share of borrowers with FICO scores below 640 getting mortgages across all loan types has sunk from 12% to 5% since the onset of the outbreak.
A New Jersey Redfin agent, in fact, reported that one of his clients was denied an FHA-backed mortgage despite his credit score passing muster when applying for the loan. But because the lender hadn’t submitted the application to the government before standards had risen, the loan request was denied.
But it’s not just the lowest tiers of borrowers who are feeling the crunch of rising credit criteria.
“Buyers at both the low and high ends of the market seem to be having the most trouble getting loans right now, leaving the middle of the market relatively unscathed,” said Bokhari.
Jumbo loans, while often high-quality mortgages, aren’t guaranteed by Fannie Mae or Freddie Mac, leaving many viewing them as risky plays in the current environment. Lenders have circled the credit wagons as a result, with the MBA’s Mortgage Credit Availability Index plummeting by 36.9% in March.
“COVID-19 has significantly impacted the lending industry in many ways over the past few months and jumbo loans have been one of the first products taken off of the shelves,” Redfin mortgage adviser Katie Bradner said on the company’s blog.
And as jumbo loan products have lessened, so, too, have higher end listings. Many high-end sellers, Redfin noted, have the luxury of pulling their listings until the time is right to sell, and with tighter credit stunting demand combined with continued fears of coronavirus spread, it makes sense for many to de-list. Redfin, in fact, found that, in the five weeks leading up to midpoint of March, listings across the country priced $1,000,000 and above have seen a net contraction of 1% of total inventory — that is, more unsold homes were de-listed than new homes added to the market. Compare that to the five weeks leading up to the midpoint of March 2019, when the same segment of the market saw listings grow 28%.
You can find the rest of Redfin’s findings on the company’s blog here.