Hello, LOs!
Last week, I asked you how easy it would be to decide whether someone had bona fide Covid-related financial distress when underwriting a mortgage. How would a lender distinguish between those who faced a temporary financial distress, and who made risky decisions? And could the potential ambiguity lead to deserving borrowers being unable to get credit?
I wanted to highlight some of your answers.
"It's unfortunately not easy at all to determine what was a result of a lack of financial discipline or even fiscal irresponsibility versus truly one-off circumstances that may or may not have been COVID-related," one LO wrote. "We could certainly look at the borrowers individual picture, and after having talked with them, gathering explanations, etc, believe they're a good credit risk, but after investors aggressively pursued lenders for loan buy-backs and issued immense fines last time lenders erred in favor of serving customers, it'll be no surprise if lenders are extremely cautious in lending to people that may have been impacted by COVID (but may not have!)."
Another LO pointed out that federal agencies differ in their approach to measuring income gaps.
Here's the landscape he described: GSEs require two years of consistent employment, while the VA allows a gap of up to two months. The FHA considers current income as effective if a borrower has been working for the last six months and has a good pre-COVID work history. The USDA requires a one-year work history with the same employer. Fannie Mae doesn't consider furlough pay as income.
Those varying guidelines are difficult to keep straight in normal times.
But, especially given the proliferation of automated underwriting processes, negative impacts on credit scores as a result of COVID may prove a bigger obstacle for borrowers.
"Our industry is going to pay a price from consumer advocacy groups screaming injustice if credit scoring does not negate COVID-era delinquencies," he said. "Policing what was negligence versus COVID-causing promised to be a nightmare so I suspect we'll see a blanket enforcement to suffer the consequences of derogatory credit ratings or there will be a window where the credit agencies are directed or influenced to suppress negative reporting."
Another LO told me that each case would need to be evaluated individually, but that consumers are generally not penalized in mortgage underwriting for using legitimate assistance.
"But, these measures weren't designed to help people qualify for a home loan either," he wrote. "Credit scores, income and job stability do still matter when it comes to mortgage lending."
LOs, what guidance, if any, are you hoping for from federal agencies to help you navigate these questions? Send me a note: gkromrei@housingwire.com
Georgia Kromrei
Senior Mortgage Reporter, HousingWire
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