Why is JPMorgan Chase tightening lending to 20% and 700 score?

Question

Chase requires new home buyers to put 20% down and have a 700 FICO. I believe the national average is around 7% for first time home buyers. What I don't understand is they still offer their DreamMaker loan with 3% down for low credit scores.

A lot of lenders have been overrun with refinance requests in the last weeks, there is only so much volume they can process. Chase is I think the 4th largest lender - is that why they do that, to reduce volume to the cream of the crop?

From the data I see every day it looks like CV will have very little impact on residential housing: low inventory, high demand, multiple offers - unchanged to this day.

Why did Chase do that?

Will other large lenders follow?

Marco Bario · Answer

According to the latest Black Knight estimates, between 1.5 million and 2 million existing mortgagors have become delinquent and/or filed for forbearance in the last two weeks. It took two years to reach 2 million delinquencies during the Great Recession.

5 million workers filed unemployment claims last week, bringing national unemployment somewhere between 15% and 20%.

I think the answer to your question is they're battening down the hatches.

Chris Mason · Answer

Chase's 3% down option for moderate income folks is just re-branded Fannie HomeReady and Freddie Home Possible. Fannie and Freddie both encourage this re-branding -- if you are logged into their respective websites as a mortgage industry insider, they even provide marketing material where you get to specify what you want to call "your" re-branded loan program. So I could do, for example, the "EXCLUSIVE Cornerstone 3% down" program, since my last name is Mason (masonry, brickwork, cornerstone, get it?). And it's just that vanilla program directly from Fannie and Freddie. But you'd feel more special than if I did what I actually do, which is just call it HomeReady or Home Possible.

In any case, the programs are used to check Community Reinvestment Act boxes. If you're going to give a bunch of poor people checking/savings accounts that you charge them fees for, you also have to do a certain number of mortgages in those communities where they live. The programs have income limits by census tract for this reason, to encourage the program's use in underserved communities. That's why Chase didn't ditch the program -- you bet your rear end they would if they could!https://www.investopedia.com/terms/c/community_reinvestment_act.asp

Marcus Auerbach · Answer

@Jaysen Medhurst that is the reasonable explaination on the surface, but that's the part I don't buy. It does not make sense to keep the DreamMaker program in place, which is specifically for low credit scores with 3% down.

The other two metrics like you said would be secondary market liquidity and of course their internal capacity to process.

I spoke with a commercial banker yesterday and he said they are now asking investors to provide data about the tenant income situation on appartment deals as part of their underwriting process.

On the residential side I have noticed banks have stepped up that VOE - verification of employment - and that has been an issue, as emplyers are not as good answering those phone calls as they used to be. We recommend to all our buyers to connect their HR department with the lender up front, to make sure when they call an hour before closing they get a response! On the listing side we try to promt the other agent to do the same. Trying to stay ahead of the changes..

@Tim Johnson I have seen that too, but the explaination I got was that they have just put it on hold for now more because they have so much work with adjusting existing loans, so its a manpower issue.

@Tom Shallcross I think that's just it - they can't handle the volume right now. The increase in home prices has had no impact so far on buyers; relative affordability has gone up as a function of lower rates and (finally and slowly) rising wages. Affordability in terms of % of household income for PITI is higher now than it has been in the last ten years, about 17%. That's been a major driver on the demand side, perhaps also with cost of rent as a % of houes income being on a record high, about 28%. This is what finally drives even the millenials to buy a house!

Tom Shallcross · Answer

Hey @Marcus Auerbach - I saw this as well.  I asked my broker and he mentioned refis are as high as they've been in the last 10-15years and everyone is absolutely slammed with forbearance requests.  He truly thinks it is temporary and Chase alludes to the safe narrative in some of their PR statements:

"Amy Bonitatibus, chief marketing officer for JPMorgan’s home lending service, called it a “temporary” change that would allow the bank to focus on existing customers." https://therealdeal.com/2020/04/13/700-credit-score-and-20-down-jpmorgan-ups-home-loan-standards/

I buy some of that.  However, the tightening of standards can also be a logical step to minimize their exposure moving forward in uncertain times.  Uncertainty does not mean the sky is falling, but rather all bets are on the table for what can happen in the near future.

It's similar to how you and I underwrite deals.  The less certainty we have, the more conservative we are going to be in our underwriting approach.  It doesn't mean the actually deal has become better/worse, just that when there are more variables, we tighten up.

Jaysen Medhurst · Answer

@Marcus Auerbach, everything below is based on public information and is my own personal opinion.

Lenders were bound to tighten lending standards due to the current economic uncertainty. Just look at the massive unemployment numbers we've seen for the last 3 weeks. I think we'll continue to see lenders large and small tighten their standards. Fannie and Freddie are changing their requirements, which is going to have a huge downstream impact, since they end up buying most of the mortgages written in the U.S. The entire secondary market is spooked. There are flashbacks to 2008. Can you imagine if the housing market collapsed in the same way? How would that compound the current economic crisis? That's why the Fed announced that it is willing to buy an unlimited amount of mortgage-backed securities.

The main worry of lenders is always the ability for a borrower to repay. Given how fast COVID-19 has unfolded and the fact that lenders obviously can't do anything about existing mortgages, how do they hedge their risk? By making sure new borrowers are much more likely to be able to service the debt. I think you'll see a wave of even stricter standards from other lenders for 2 reasons:

• They need to offset the risk of default on existing loans by being even more conservative about new ones.
• Many lenders aren't nearly as well capitalized as JPMC nor have their liquidity. That means they need to be even more careful about how they deploy their capital.

Jaysen Medhurst · Answer

Not every decision a bank makes comes down to profitability, @Marcus Auerbach. There are a lot of reasons to keep a program like DreaMaker up and running. I haven't read anything in the press about changes to DreaMaker. As you mentioned, I expect all lenders are stepping up VOE on all loans right now. Anecdotally, I've been hearing that related to purchases, refis, LOCs, everything.

For what it's worth, I spoke to 3 different lenders last week about a commercial loan. The first told me that they're so busy processing SBA applications that they won't even be looking at RE for several weeks. The second two told me the same thing your commercial guy told you.: They are still making loans, but have stepped up due diligence on the deal, borrowers, and tenants.

Tim Johnson · Answer

My take and its short and simple.  No lenders what loans right now because they are worried about early pay offs from refi and number 2 is loan forbearance programs.

Almost all lenders have raise credit score requirement and stopped lending on many programs.  The big one I see that is going to destroy the economy is construction lending.  Many lenders have completing shut off that product right now, not just raised requirements but completely shut it off.

Why is JPMorgan Chase tightening lending to 20% and 700 score?

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