Here's why it's suddenly much harder to get a mortgage, or even refinance

• Mortgage rates have fallen back to recent lows. 
• And there are still plenty of current homeowners who could save money through a refinance.
• Unfortunately both types of loans are now harder to get as the mortgage market is badly battered due to the impact of the coronavirus pandemic on the economy and employment.

A man enters a Bank of America branch in New York.

Scott Mlyn | CNBC

Mortgage rates have fallen back to recent lows, and though homebuyers aren't exactly banging on the doors during the spring housing market amid the coronavirus crisis, there are some hardy ones out there in the hunt. And there are still plenty of current homeowners who could save money through a refinance.

Unfortunately both types of loans are now harder to get as the mortgage market is badly battered on several fronts due to the impact of the pandemic on the economy and employment.

Mortgage credit availability in March fell to the lowest level in five years, according to a survey by the Mortgage Bankers Association. Lenders cite a large drop in liquidity, as investors in jumbo mortgage-backed bonds pull back. Jumbo loans are those valued above the conforming loan limit of $510,400.

"There was a reduction in the availability of loans with lower credit scores and higher LTV ratios, and the largest pullback came from the jumbo and non-QM space," said Joel Kan, an MBA economist. Non-QM are loans that fall outside the criteria for government purchase. "Lenders are making credit criteria changes to account for the increased likelihood of forbearance and defaults, as well as higher costs."

Early last week, Wells Fargo, the nation's largest mortgage lender by volume, temporarily suspended its purchasing of nonconforming, loans from correspondent sellers, "due to unprecedented market conditions," according to Tom Goyda, a company spokesman.

It is also scaling back its own retail originations of nonconforming refinances and conforming high-balance loans.

"These difficult business decisions reflect efforts to prioritize how we serve customers and maintain prudent balance sheet discipline," said Goyda.

New guidelines

JPMorgan Chase, another of the nation's largest mortgage lenders, changed its underwriting guidelines. As of this week, new mortgage applicants will need a minimum FICO credit score of 700 and will have to make at least a 20% down payment on the home.

"Due to the economic uncertainty, we are making temporary changes that will allow us to more closely focus on serving our existing customers," said Amy Bonitatibus, chief marketing officer for Chase Home Lending. 

Mortgage servicers are being besieged by calls from borrowers requesting the government's forbearance program, wherein borrowers can miss up to a year's worth of payments which will then have to be paid later. The servicing industry has been begging the Federal Reserve for some kind of liquidity facility to help them make their payments to bondholders, but so far only Ginnie Mae has done that for FHA loans. The lack of liquidity is putting the whole servicing industry at risk and adding to a growing list of reasons to tighten lending.

As for liquidity in overall lending, the Fed did step in and is now buying billions of dollars' worth of conforming mortgage-backed bonds, but there is much less liquidity for other types of lending. Investors simply don't want to take that risk.

"No one really wants to hear this, but the tightening is very logical in this environment," said Matthew Graham, chief operating officer at Mortgage News Daily. "Sure, investors will certainly get their money back at some point. But how long will that take, how much of their business will be affected, and what will the interruptions/headaches look like?"

Several nonbank lenders are also raising minimum credit scores for FHA loans, which are generally used by borrowers with lower scores and lower down payments. The FHA itself has not changed its guidelines.

Adding to the difficulty in originating mortgages for both new home purchases and refinances are changes to underwriting guidelines by Fannie Mae and Freddie Mac, who, along with Ginnie Mae, purchase the majority of mortgages today. They are requiring that all income and asset documentation for borrowers be dated within 60 days of the initial application, compared with the 120-day standard time frame.

This is likely because people are losing jobs and income at an unprecedented rate. For self-employed applicants, lenders must verify the existence of the borrower's business within 120 days. That has now shrunk to just 10 days.

Longer time horizon

Given how difficult the whole mortgage process now is, with title companies closed or working remotely and notaries and appraisers unable to do their work in person, the time horizon for closing a loan is only getting longer, not shorter. Typically, following natural disasters, they will do just the opposite, extending the time frame to 180 days before a lender would have to re-verify a borrower's income and assets.

Just two months ago, before the pandemic had struck the U.S. widely, mortgage rates were near record lows and refinance demand was booming. Applications jumped dramatically. But now even some of those applications will be rejected either due to timing issues or because borrowers no longer qualify. 

For homebuyers, and there are still some out there, the timing of locking in a mortgage rate and then getting all the way through to closing on a home has lengthened dramatically, putting the availability of that mortgage at risk. Some builders, like Lennar and Taylor Morrison, are experimenting with drive-through closings, keeping with social distancing while still selling homes. 

"It depends on what type of mortgage you are looking for in terms of difficulty," said Guy Cecala, CEO of Inside Mortgage Finance. "A conforming mortgage for a home purchase is probably the 'easiest,' while a jumbo refi is probably the 'hardest' to get in the current environment."