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Before Making Loans, Some Mortgage Lenders Ask, Do You Really Plan to Pay This?

Posted by: | Posted on: August 27, 2020

Some mortgage lenders are asking customers taking out a mortgage to confirm they don’t intend to seek forbearance, a move meant to keep losses low during a pandemic that has put millions of Americans on shaky financial footing.

The unusual requirement comes in the form of a new document included in many borrowers’ closing paperwork. While the language varies, the forms generally tell borrowers that they won’t be allowed to skip payments until their loans are backed by the government, according to forms reviewed by The Wall Street Journal. The forms, known among lenders as “Covid-19 borrower certifications,” often ask home buyers to confirm that they don’t expect changes to their income. Some warn of potential penalties if any of the certifications are later proven to be false.

The $2 trillion coronavirus stimulus package Congress passed in the pandemic’s early days allows struggling homeowners to request up to 12 months of forbearance on federally backed home loans, meaning they can temporarily pause their payments and make them up later. But it can take days, weeks or sometimes even months for a newly made loan to get government backing.

Lenders can still unload loans that are already in forbearance. Government-backed mortgage companies Fannie Mae and Freddie Mac said this spring they would begin to buy loans in forbearance, but at a discount of either 5% or 7% of the loan’s value, depending on whether the borrower is a first-time homebuyer. The Federal Housing Administration said it would insure loans in forbearance but could charge the lender a 20% fee if the loan goes into foreclosure.

Together, Fannie Mae, Freddie Mac and the government-owned mortgage company, Ginnie Mae, back more than 70% of outstanding U.S. mortgages, according to the Urban Institute, a nonpartisan policy research group in Washington, D.C.

Lenders are struggling to figure out which borrowers will be able to pay back their loans. The current recession has made it particularly hard to determine who is creditworthy: Millions of Americans are behind on their debts, but their missed payments aren’t reflected in their credit scores or uniformly recorded on their credit reports because of protections in the stimulus law.

Many lenders have responded by tightening credit. Credit-card issuers are closing accounts and lowering credit limits. The Mortgage Bankers Association’s Mortgage Credit Availability Index, designed to gauge access to a variety of mortgage products, shows consumer access to home loans fell about 17% between March and July.

For mortgage lenders, the forbearance penalty is an added concern. “The hit more than wipes out your margin—over something you have no control over,” said Esther Phillips, senior vice president of sales at Key Mortgage Services Inc. “You can’t control what customers do after you close.” Key’s form asks borrowers to certify they haven’t applied for forbearance from any mortgage payments and have no plans to ask for it.

Adrian Leal was surprised when one of the mortgage lenders he was considering asked him to sign such an agreement in the late spring. The form, from LoanPeople LLC, asked him to confirm that he had no plans to request a forbearance.

At first, Mr. Leal thought it meant his home loan would never be eligible for forbearance. He now believes the letter meant he wouldn’t be eligible for forbearance until a government agency agreed to buy or insure his mortgage.

He is still employed as a software engineer but said he would turn to forbearance if he lost his job.

“I’ve never bought a home before, so I needed to be careful,” Mr. Leal said.

The share of mortgages in forbearance, 7.2%, has declined for 10 straight weeks, according to the Mortgage Bankers Association, but is still far above pre-pandemic levels. The Urban Institute has estimated that just 3,750 loans will be subject to the forbearance penalty.

But lenders are still doing everything they can to avoid it, including tightening credit, with wide-ranging effects. Many have raised minimum credit scores and lowered maximum debt-to-income ratios.

Bernadette Kogler, chief executive of RiskSpan, a mortgage analytics firm, said lenders are going to pull back on credit and “make fewer loans that might go into forbearance.”

The resulting credit pullback will limit purchase and refinance opportunities for up to 255,000 consumers, the Urban Institute said. The share of consumers with credit scores below 700 who purchased or refinanced a home fell in the first half of the year.

Verifying that mortgage applicants have a job, a typical part of the lending process, has become a major concern for lenders during a time of high unemployment.

Dustin Adair said his credit union called his office to make sure he still worked there six times between his loan’s approval and the closing on his Austin, Texas-area home this month.

Mr. Adair, a legal assistant, understands the rigorous vetting. He was furloughed for about two months in early spring when the lawyers at his office began working from home, delaying his quest for mortgage preapproval.

“Every day I go into work, I think, ‘Well, what’s going to happen if we go back into quarantine for another three months?’” Mr. Adair said.

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