BLOG VIEW: The year began with what seemed to be a lot of promise and favorable outlook. However, after the first couple of months passed, news of a worldwide health crisis drastically and quickly made an impact on everything from how and where people work to the stability of the economy.
Although there have been a fair number of challenges this year, one area of opportunity has been historically low interest rates. Those individuals with stable jobs, who have not been greatly impacted by the pandemic, have seen these low rates as an opportunity to go after their dream homes or refinance their current mortgages to reduce their monthly payments. While it is an ideal opportunity for buyers, lenders are met with a new set of challenges resulting from the high volume of originations.
Evaluating Lender Risk
For portfolio lenders and mortgage insurers, a COVID-19 environment introduces new risks, and many are considering these new risks when writing new loans. For instance, geographic areas, especially those that are heavily driven by tourism like Las Vegas and Central and South Florida may be riskier since travel has been heavily impacted. This also is true for geographic areas where there are high numbers of Coronavirus cases, which can lead to heavy restrictions that can impact local economies.
Although lender risks may be higher at this time, the risks are different between lenders that sell their loans to the GSEs and lenders that retain and portfolio the loans they originate. For lenders selling to the GSEs, the focus is to keep underwriting quality high. While for portfolio lenders and insurers, it’s both underwriting quality by way of credit, capacity and collateral as well as the condition of the economy.
The Current Risk of Buyers
Outside of the typical risk factors, lenders are taking on a new challenge of identifying viable buyers in this climate. Current buyers are under a microscope during this unique time as a lot can happen between the time of being approved for the loan and closing on the loan.
The pandemic has heavily impacted employment, which for lenders creates an increased risk. For lenders it is more than just the W2. Although the W2 gives important insight into an individual’s income, it may not contain the most up to date information and may incorrectly portray a buyer’s current income and financial situation. Even employment verification has brought its own set of challenges as the usual contacts for an organization to confirm employment are not as accessible during the pandemic. Additionally, many lenders are working through third party services to confirm employment which may have their own delays in reporting the most up to date employment information. It is important to verify employment as close as possible to closing a loan.
In addition to the already challenging environment, lenders continue to need to be sure they are treating all buyers equally. Although Joe may work in a casino in Las Vegas, he still needs to be considered for a loan just as much as a Veronica, an ER nurse in New York City. The financial circumstances may be a bit different and Joe may be considered more of a risk, but if he is still employed with a great employment history, great credit, and the value of the collateral value is justified then Joe is qualified and should get a loan.
Outside of viable buyers, the value of the home being financed is also critical. Fannie Mae and Freddie Mac have offered new special accommodations during the COVID pandemic period for appraisals. The accommodation allows homeowners to supply interior photos of the home being appraised. This accommodation was approved in case appraisers were unable to get into the home to evaluate the interior condition. This introduces new risks in case the photos do not fully represent the interior condition of the home. However, most appraisers have been able to conduct both interior and exterior appraisals. So, the good news is that the uptake of those accommodations is very small which reduces that risk.
Not All Doom and Gloom
While there may be quite a bit of risk with the current environment, there also are a lot of benefits too. There is still high demand for homes and there is a limited supply. This environment continues to support Home Price Appreciation (HPA).
Additionally, the current situation means many people’s houses have become both their home and their office which has made them realize they need more space to accommodate their needs, especially since there is no clear end in sight for when things will go back to “normal.” As a result, homebuilder confidence is at an all-time high. Although, challenges have arisen as there is limited availability of building materials due to lumber mill shutdowns and forest fires in the Western US. This lack of supplies may impact the rate of new housing supply which also supports HPA.
Weighing Out the Risks
Between high unemployment rates and uncertainty around the next year due to a lack of vaccination availability and a fluctuating economy, the overall risk is hard to determine but is higher than normal. Following guidelines and incorporating high underwriting quality can help mitigate risk along with being cautious and diligent with loans. Although different areas of the market and country are impacted differently, opportunity still remains for all industry participants.
Dan Ortiz is director of risk management at Genworth Mortgage Insurance.