What are the unintended consequences of the CARES Act on the Mortgage Lending & Real Estate industry?

Some lenders are tightening lending standards because of forbearance. Why? Forbearance allows the delay of payments from the mortgage holder to the loan servicer, but the loan servicer must still make principal and interest payments to the bond holder, and make property tax and insurance payments when they are due.

In forbearance, cash is not coming into the loan servicer however cash must go out. Many of the companies that originate mortgage loans are also loan servicers. Servicers must conserve cash, reducing the cash available to make new loans. The end result, to reduce this burden, these companies tighten standards so they only take on the loans that have a very high likelihood of not entering forbearance.

Some lenders have stopped originating new loans altogether due to this economic uncertainty.

Mortgage interest rates are low for well qualified Borrowers. Rates for lower credit score Borrowers are increasing as banks raise rates and lending standards on those considered to be “riskier” Borrowers with a higher likelihood of forbearance or default (even more prevalent for those Borrowers looking at Government insured or Jumbo financing options) . This is unfortunate, when now more than ever these Borrowers may need lower monthly payments and overall financial relief.

These tighter lending standards and higher interest rates can also make it difficult to close a deal when contingency for the sale of a current home exists.

The CARES Act includes a moratorium on foreclosures and evictions due to non-payment of rent. Some purchase agreements require the removal of a tenant or the completion of a foreclosure sale. The CARES Act may delay these purchase agreements, putting Earnest Money at risk.

Credit: Keller Mortgage