How COVID-19 Pandemic has shifted the Mortgage Industry
The COVID-19 crisis is causing great concern and economic distress to businesses, consumers, and people across the world. Its impact is widespread. While some businesses are recording very low sales or progress, some have gone into a complete shutdown due to strict restrictions put in place, such as lockdowns. So far, it’s clear that the impact of coronavirus pandemic will pose challenges to many sectors, and the mortgage industry is not exceptional. The situation will affect the commercial lenders, renters, and borrowers in the same way. Here are some of the issues facing the lending market.
Closing Transactions
Following the economic hardships, many borrowers and renters’ ability to make mortgage payments and clear debts will be reduced. For that matter, both apartment tenants and retail tenants will delay payments or completely shut down due to economic or pressure. With the declining economy, mortgage companies will face a significant challenge to chase down payments and keep proper documentation. Similarly, the situation poses a significant challenge when it comes to handling transactions that are yet to close as well as those experiencing hardships. Bloomberg’s report of 28th April states that there will be chaos when the COVID-19 crisis is eventually over, and it’s time for payments.
for the loan transactions yet to be closed, and the borrower has not been issued with a term sheet and which closing conditions have not been settled, it’s going to be hard to satisfy the conditions for both the lender and borrower. Almost all types of loans have a closing condition to ensure after the closing the transaction, no further changes arising from economic or personal perspective that can be allowed. However, with the financial constraints experienced, it may be hard for many borrowers to close their transactions but again there are who are willing to close.
Modification of Loan Terms
On the other hand, as COVID-19’s impact spread to other industries, many people are feeling the heat and are reaching out their lenders to try and discuss their situation regarding loan repayment. Some lenders may allow for borrowers facing hardships to propose personal modification terms. Many distressed borrowers might request for reduction of payment, reduction of interest rate, and other loan waivers. In some cases, borrowers may even go as far as adding equity partners to help reduce the financial stress. At this point, a lender will be forced to seek for extra financial and property information to ascertain the financial capability of the borrower. Similarly, the lender might ask for additional materials such as lien searches and title.
When borrowers request payment relief from lenders, the lenders also take the opportunity to protect their businesses. For instance, as the number of people losing jobs increase, and many borrowers are asking for extension of loan repayment or waiver of some amounts, lenders are also increasing the credit score requirement to reduce the risk of defaulting. Also when borrowers present their loan modification forms, lenders use it to rectify any mistakes or deficiencies within their systems. Some of the areas that lender are going to more keen include the checking for proper documentation, check for any missing document or even if the documents have any errors. A lender should also check for validity of insurance. In addition to due diligence, the lender may find it necessary to add their conditions to the modification request.
Pre-Workout Agreement
The third issue is the pre-workout agreement that may require a lender to ask a borrower to sign a pre-negotiation agreement before holding discussions. This step allows both the lender and borrower to authenticate the process and ensure they are both frank in their efforts. The agreement should state the current loan status including the defaults if any. Additionally, the agreement should also state that the modifications, draft documents and negotiations are not binding till an agreement is made. The agreement should also provide the lender’s right regarding the loan documents as well as define the rules governing the process.
Conclusion
The economic effects of coronavirus crisis, poses significant challenges in the mortgage industry. as COVID-19 continue to spread, loan providers should expect an increased number of loan relief requests. Thus, they will have no choice but re-check their current loan transactions and exercise diligence in handling the entire process.