Virus scare creates perfect storm for mortgage lenders
By Kate Berry and Allissa Kline
The coronavirus outbreak has belted mortgage lenders with a ripple effect the size of a perfect storm: record refinancing demand, time-consuming credit checks and lots of questions about workouts for existing loans that could be in jeopardy.
Lenders were having trouble with staffing long before the onset of the COVID-19 pandemic because low interest rates had led to a stampede of borrowers seeking to refinance. Now emergency action by the Federal Reserve has dropped rates to nearly zero, and more homeowners want to lower their mortgage payments as businesses, according to one estimate, lay off or cut back on hours for nearly 1 in 5 workers.
Some banks have shifted employees to help process a backlog of loan applications. These workers will have to reverify income and employment during a time when many borrowers are no longer working. Others must handle a deluge of calls from panicked customers asking for forbearance on their current loans.
“The resource constraints are phenomenal — it’s going to be a lot more difficult than just moving bodies around,” said Ted Tozer, a senior fellow at the Milken Institute and former president of Ginnie Mae. “It’s not only crazy as far as staffing, but what makes this very difficult is that lenders have to go back and revalidate every loan they have in their pipeline. The question also is how much of this they can do remotely and whether there is any slack to move to servicing.”
The same crisis that fed the refinance wave could ultimately kill it, Tozer warned. “If one in five people have income disruption, then they can’t refinance,” he said.
But that's not the problem right now. Refinancings currently make up 75% of all mortgage applications and have been strong since the second quarter of 2019. The Mortgage Bankers Association’s Refinance Index fell 8% for the week ended March 13 as economic volatility increased but was still up 402% from the same period a year ago.
The difficulty of verifying borrower incomes has forced lenders to ask for waivers from Fannie Mae, Freddie Mac and their regulator, the Federal Housing Finance Administration, to allow for verbal verifications of employment. Nonbank lenders also are seeking appraisal waivers and assurances that gap insurance meets lien requirements if there are delays in recording titles and mortgage notes. It is unclear if they will get such waivers.
Another key problem is that lenders rely on underwriters, notaries, title and escrow companies, and county recorder offices that have closed temporarily.
“We all have mountains of pipelines of loans,” said Bill Dallas, president of Finance of America Mortgage, which sells 90% of its loans to Fannie and Freddie. “You can’t record a loan if nobody is there.”
Many independent mortgage bankers are having a hard time selling nonagency loans that normally would be purchased by big-bank aggregators.
"Lending is in a bottleneck," said Larry Goldstone, president and CEO of Aventur Partners, a Santa Fe, N.M., nonbank lender specializing in jumbo loans. "Most of our correspondent buyers and wholesale buyers are discouraging new loans. They are bloated with loans in process and cannot take on any more."
Dallas and Goldstone both have experience with mortgage shocks. Dallas's Ownit Mortgage Solutions was the first high-profile casualty of the last mortgage crisis, and Goldstone's Thornburg Mortgage filed for bankruptcy in 2009.
Mike Fratantoni, the MBA's chief economist, said lenders were “maxing out on overtime and tapping [other personnel]” to handle the increase in volume before the pandemic hit. Now, banks are turning outward and trying to hire new employees to fill the gap. But that is not so easy in an environment where people work remotely.
“Most lenders had business continuity plans in place, so they knew how to move in this direction, but some of the challenges around this [situation] are unique,” Fratantoni said. “We’re hearing from lenders that they are adjusting and getting workforces out remotely and technology is working … but there are steps in the process that are still physical, like the actual mortgage note. If it’s a paper note, someone still has to show up at the office and collect those and send it on to the next step in the process.”
Large regions of the country could shut down, with residents asked to shelter in place as has happened in San Francisco and six neighboring counties. Lenders have asked counties to give exemptions to continue processing loans even as nonbank lenders grow increasingly concerned about liquidity and the potential for severe disruptions in financial markets.
Staffing in a time of social distancing
Big banks are being whipsawed by the operational challenges of originating loans and redirecting staff in a time of social distancing.
Bank of America is tapping into its existing workforce to handle an uptick in purchase applications and demand for home equity loans. A spokeswoman for the $1.9 trillion-asset bank in Charlotte, N.C., said there has not been a slowdown yet in applications, though closing times for all loans will be delayed. BofA also is adding another 30 days of interest rate protection for rate locks, for a total of 90 days, at no cost to consumers.
Wells Fargo is continuing to hire loan officers, underwriters, processors and closers. A spokesman for the $1.9 trillion-asset San Francisco bank said Wells is shifting workers from its servicing operations to mortgage processing, but he as ideclined to say how many had been moved.
Martin Griffith, president of Bank on Buffalo, a division of $3.8 billion-asset CNB Bank in Clearfield, Pa., said refinancing requests have more than doubled in the past two weeks. Home purchase volume is up but is expected to drop as more people self-quarantine.
All banks are dealing with a massive influx of calls from current borrowers asking for forbearance on April mortgage payments due to job losses.
Griffith said Bank on Buffalo is lowering rates for existing customers rather than having them refinance — which most banks are doing along with extending rate locks.
“If a customer is in good standing with us, we provide them with an [interest] rate modification versus taking them through the entire application and processing and underwriting process,” Griffith said. "It relieves us in large part from handling the increased [refinance] volume."
Shift to servicing
BofA, Wells and JPMorgan Chase are all taking applications from customers asking for forbearance after the FHFA directed Fannie and Freddie to suspend all foreclosures and evictions for at least 60 days for homeowners with mortgages backed by the government-sponsored enterprises. Banks generally are extending those moratoriums to loans in their own portfolios as well.
“We have hundreds of customers in the pipeline for forbearance plans — that’s what our main focus is right now,” said Amy Bonitatibus, a spokeswoman for JPMorgan.
Tozer said the current crisis could create a replay of problems that surfaced in 2009 and 2010 when borrowers complained that servicers were not helping with loss mitigation and the Consumer Financial Protection Bureau issued rules requiring that servicers provide borrowers with a single point of contact.
Lenders could be in a bind if they have to shift employees from loan origination and processing to servicing because the technology for those functions are different. A particular problem is getting verbal verifications of income when so many businesses are closed and there is no one to verify a borrower's employment.
“A lot of these refinances are never going to close because the lender will find out the borrower doesn’t have any income or employment,” said Tozer. “Lenders are going to be using people up to do processing and re-verifying income and once they start working through their pipeline, I don’t know if there is going to be any slack capacity to shift to servicing."
Lenders also are keenly aware from the mortgage crisis that they remain on the hook for repurchase risk for loans sold to Fannie and Freddie. Flaws in the underwriting process led to massive repurchase demands during the last mortgage crisis by the government-sponsored enterprises, which forced banks and lenders to repurchase loans because of claims of misrepresentation and fraud.
Lenders and servicers are waiting for guidance from regulators on how to proceed.
County recorders closed
Though the mortgage industry has made huge strides over the past five years in moving to digital mortgages, including getting tax records and bank statements delivered electronically by third-party service providers, back-office functions cannot all be done by employees who telework.
"All the things that people really don't understand about mortgages, the back-end work that we do, is hard to do with everybody working from home," Dallas said.
Getting signatures with notaries present and recording titles are among the hurdles keeping loans from closing, said Nanci Weissgold, a partner at the law firm Alston & Bird who represents mortgage lenders and servicers.
"How do you get documents notarized when only 23 states have effective remote notarization laws?" Weissgold said. "Documents getting notarized is one issue, but the bigger issue is funding the loan and recording it in local jurisdictions."
Both California and New York have measures pending for remote notorization but neither state has yet passed a law, she said.
Settlement service provider Equity National Title sent out a memo to its clients on March 16, warning that there were a number of county and city recording offices closing in response to COVID-19, some with little-to-no warning.
Underwriters generally will not close a loan, nor would the loan be insured, in any municipality where loans cannot be recorded.
"What this means is we will verify before closing whether an office is open, closed to the public, or shut down, and its ability to accept recording documents,” Jim O'Donnell, Equity National president, said in the memo to lenders.
Simplifile, a Provo, Utah, firm that facilitates the electronic processing of mortgage records, keeps track of which county recording offices are open and accept e-recordings. Three counties in Colorado, three in Michigan, two in New Jersey and one each in Georgia, Maryland, New York, North Carolina and Pennsylvania were closed, according to Simplifile. Another office in Chesterfield County, Va., was expected to reopen on March 19 for paper and e-recordings.
Appraisals also are an issue though Fannie and Freddie often provide property inspection waivers and appraisals are only required on loans of $400,000 or more.
"We are in a crisis, so there is going to have to be some accommodation and temporary waivers to help people get through the crisis — otherwise lenders cannot continue to do business," said Weissgold.
Bradley Finkelstein contributed to this article.