May 8th, 2020 12:17 PM by Jackie A. Graves, President
For tens of millions of American workers who have lost paychecks
to the coronavirus, a furlough sounds less
ominous than a layoff.
For furloughed workers applying for mortgages, however, the
nomenclature might be a distinction without a difference. As the economic
slowdown shines a light on credit risk, lenders are taking a hard-nosed view of
any loss of income, whether the cause is a furlough or a layoff.
A furlough means that an employer requires a worker to take time
off without pay, although the employee typically keeps health benefits and
expects to return to full-time work in the near future.
“A furlough – especially if it’s unpaid – will likely carry
similar weight in a lender’s eyes as being laid off,” says Adam DeSanctis,
spokesman for the Mortgage Bankers Association. “Depending on the borrower’s
field, a furlough would likely show instability in employment and a disruption
More than 33 million Americans have filed for unemployment
benefits since mid-March, when the pandemic blindsided the U.S. economy. As a
result, loan officers have stepped up their scrutiny of borrowers’ employment
situations. Some mortgage brokers say they call applicants’ employers daily to
verify that the borrower is still on the job.
Fannie Mae sees furloughed
borrowers as risky
Mortgage giant Fannie Mae said in a May 5 notice to lenders that
it takes an unfavorable view of furloughs.
“A furlough is a suspension from active employment that does not
typically guarantee restoration of an employee’s position when the furlough
period ends,” Fannie Mae stated. “Until furloughed employees actually return to
work, they are unable to provide evidence of a stable and reliable flow of
employment-related income and are therefore ineligible under our Temporary
Leave Income policy.”
In past crises, such as federal government shutdowns, employers,
employees and lenders understood furloughs to be temporary. Federal agencies
furloughed workers, and then quickly brought them back.
The coronavirus pandemic is different, both in its sweep and its
level of uncertainty. As Fannie Mae noted, furlough might just be a polite way
of describing a layoff.
No clear definition of
A furlough affects different borrowers differently. Some
employers require furloughed workers to go weeks or even months without pay.
Macy’s in late March furloughed most of its 125,000 employees.
The retailer couldn’t say when they’d be back on the job, although some of its
stores in some states are reopening.
In another example, Redfin, the Seattle-based real estate
brokerage, announced in early April that some of its employees would be
furloughed until Sept. 1 — meaning nearly five months without pay.
Other companies ask workers to take unpaid leave for just a few
days, or for a week per month. Newspaper publisher Gannett said thousands of
its employees would be furloughed for one week a month in April, May and June,
equating to a pay cut of about 25 percent during that period.
Given that wide range of possibilities, lenders look at
furloughed borrowers’ financial pictures on a case-by-case basis, says Dan
Smith, president of First Community Mortgage, a division of First Community
Bank of Tennessee. “It’s fairly nuanced,” Smith says.
In one recent case, a dentist who had been furloughed presented
his loan officer with a document from his employer.
“He had a letter stating that the practice had every intention
of reopening,” Smith says.
First Community Mortgage approved the loan, the dentist has
returned to work, and the bank plans to sell the loan to Fannie Mae or Freddie
Mac. For an industry that has relied on regimentation and clearly defined rules
over the past decade, the coronavirus pandemic has introduced new ambiguities.
With layoffs mounting, many lenders have raised requirements for
credit scores and down payments and otherwise moved to cut their risk.
“It’s a really tough balance,” Smith says. “In an industry that’s
heavily regulated and relies on process and guidelines, we’ve suddenly got a
huge fog in front of the mirror.”
In the case of furloughs, the borrower’s financial situation
plays a role. In a two-income family, a furlough of a higher-earning partner
might kill the mortgage application, but a furlough for the lower-earning
spouse might not matter.
With the U.S. economy booming in recent years, some mortgage
lenders had resumed offering loans to borrowers who couldn’t qualify for
mainstream mortgages, such as self-employed workers.
As the global pandemic grinds on, even lenders known for
flexible mortgage approvals have stopped extending credit. For instance,
Deephaven Mortgage says it has ceased making loans.
“Due to extreme market volatility, Deephaven has suspended all
loan applications, locks, closings and fundings at this time,” the company says
on its website.
Other alternative lenders — those who make loans not backed by
Fannie Mae and Freddie Mac, the mortgage giants who buy most loans in the U.S —
have pulled back as well. That means many workers who have been furloughed or
laid off are unable to take advantage of rock-bottom mortgage rates.
“We have no idea if or when they will start earning income
again,” says Jim Sahnger, mortgage planner at C2 Financial Group in Jupiter,
A furlough doesn’t necessarily need to derail your plans to
purchase a property. Some steps you can take:
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