Borrowing Standards To Increase
- June 1, 2020
- 2 min read
- 79 reads
Banks and other credit lending facilities are tightening up the reigns in preparation for the economic aftermath of COVID-19.
Credit lending availability has decreased and is expected to continue to drop over the coming months. The countries largest lender by assets JPMorgan Chase among many lenders is raising their borrowing standards in an attempt to keep the industry afloat.
New Rules For New Mortgage Customers
JPMorgan Chase has temporary rules in place for new mortgage customers. New customers will need a credit score of above 700 and be able to produce 20% of the property sales price as a down payment to borrow for a new mortgage. New standards are not focused on impacting current bank customers. They are aimed toward new borrowers.
Throughout the pandemic, there has been increased pressure on bank employees. While essential workers are still on the front-line, others are working remotely from home to keep the industry ticking over.
The stricter rules will positively aid in reducing pressure on bank staff and allow them to continue to take care of current customers.
There are growing concerns within the industry that if the tightening of lending standards does not increase, there could be a full industry derailment. Most lenders, however, are following suit.
Banks And Other Lenders
Banks and other lenders are raising borrowing standards and tightening their belts.
It was not just mortgage supply that dropped, there was a credit availability decline across all lending sectors. The highest pullback of acceptance came from low credit scores and high LTV ratios.
The Conventional MCAI (Mortgage Credit Availability Index) decreased 24% in March while the Government MCAI dropped by 6%. Mortgage credit supply fell 16% across the board in March to the lowest levels since 2015.
Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, said that “Lenders are making credit criteria changes to account for the increased likelihood of forbearance and defaults, as well as higher costs.”
With COVID-19 set to keep the nation in lockdown for a while longer, millions of households are expected to fall into financial hardship. With the new forbearance provisions under the CARES Act, forbearance claims are expected to increase even further. Loans in forbearance grew the first week of April from 2.73% to 3.74%.
There has been a surge in refinancing requests throughout the industry over the last month. Request levels soared to their highest peak in over a decade.
Lenders across the board are making credit criteria changes in preparation for moderation and loan defaults. Lending APRs and interest rates are expected to increase to counteract the wave of nonpayers likely to arise due to the economic decline and extensive job losses.
For those in the market for a new property gaining preapproval for a mortgage may not be the worst idea. The new rulings will no doubt include an increase in interest; therefore, preapproval may lock you into a lower interest rate. It’s a risk either way as it’s anyone’s guess on how long it will take for the economy to stabilize. Make sure your income will not be affected before diving into a new mortgage.
Will the changes in lending criteria affect you? Comment below.