Mar 22, 2020
What a difference a week makes! A week ago, I decided to close the office to the public (we are still scheduling meetings with individual customers on an as-needed basis). A week ago, I could run down to the local pub and have a beer with my friends. A week ago, I got a pedicure.
Now our schools, bars, restaurants, salons and gyms are shut down as US COVID-19 cases soar. We're staring travel bans and a shelter-in-place order in the face. Oh yeh, and mortgage interest rates increased from 3.25%1 to 5.0%2 on Wednesday. Not kidding. (They've since settled down a little.)
The big news a week ago was the Fed's announcement after an emergency meeting last Sunday. They pledged to reduce the benchmark federal funds rate to 0 to 0.25%, restart quantitative easing, eliminate reserve requirements, and lower rates on currency swaps with five foreign central banks.
Yet, interest rates increased. Why? There are a number of factors, but they all share the same theme: risk.
The media reported that Steven Mnuchin, US Secretary of the Treasury, warned Republican Senators of a 20% unemployment rate if they didn't pass a stimulus package that would send cash to every citizen and support the airlines and other industries. As a frame of reference, at its peak, unemployment during the Great Recession was 10%. The highest unemployment rate recorded was 24.9% in 1933 during the Great Depression.
With an unemployment rate that high, consumers' ability to repay their mortgage becomes a risk. And additional risk causes interest rates to increase.
In addition, that stimulus package Mnuchin mentioned costs money. A lot of money. Money that the government doesn't have and will have to borrow from the US Treasury.
And investors in mortgage backed securities (MBS) worry about early payoffs. We are in a global recession, and interest rates decline during a recession. The normal maturity of an MBS is between four and seven years. An investor holding an MBS at 4% or above is almost certainly holding a note that will be paid off early because the consumers holding those mortgages are going to refinance when interest rates decline.
On the other hand, if you've got a note at 2%, those consumers aren't going to refinance. But a mortgage is a long-term investment. Does the MBS investor want his money tied up at 2% for 30 years? Probably not.
So mortgage backed securities are considered a risky investment right now. The Feds purchased $40 billion in bonds on Monday and another $100 billion in treasuries and MBS on Friday. While the Fed was buying, MBS improved. But as soon as the Fed's money dried up early in the week, there were no buyers for those bonds. And interest rates increased.
What will we see when the market opens on Monday? The Feds will purchase $40 billion more in MBS on Monday and have committed to $100 billion next week. I can't guarantee this will drive rates lower, but I am prepared for that possibility.
Regardless, interest rates will decline again. There's never been an economic recovery during a time of high interest rates. Interest rates must be low for our economy to rebound.
What if you can't pay your mortgage?
The media is reporting no shortage of mortgage payment relief plans.
FHA loans and mortgages securitized by Fannie Mae and Freddie Mac will be protected from foreclosure for a few months. That's great, but that's really only going to apply to a very small subset of people who have not paid their mortgage for many, many months. Foreclosures don't happen that quickly. If you just got laid off from your job last week and you don't make your mortgage payment in April, they're not going to foreclose in May. That's not how it works. Most foreclosures happen after consumers have missed payments for a year or more.
Media reports that imply that nobody's going to have to make mortgage payments for a year are highly exaggerated. First, no servicer is going to waive payments for year at this point. It's too early. We have no idea how long this will last. For all we know, everyone will be back at work by the end of April. I have heard reports of servicers willing to defer payments for 60 days, but no longer than that at present.
And keep in mind that these are deferred payments. Meaning, those payments don't just evaporate. You still owe that money. Lenders should work with consumers on repayment plans, such as allowing skipped payments to be paid back over a period of months after a homeowner returns to work.
If you anticipate having problems paying your mortgage, call your servicer. You can find their phone number on your mortgage statement or on the lender's web site. For New American Funding mortgages, that number is 800-893-5304.
Document your lost wages. Keep a log of when you call/email your servicer. And call them sooner rather than later. Don't wait until you're already two weeks late! But do keep in mind that servicers are probably overwhelmed with phone calls right now. Don't panic if you can't get through immediately. Your next payment isn't due until April 1 and it's not late until April 16.
What about new transactions?
We haven't received a lot of guidance from Fannie Mae, Freddie Mac, and FHFA about revised guidelines. These are some things for which the industry is asking:
- We're asking the GSEs to allow more Property Inspection Waivers (no appraisal) on refinances of loans from Fannie to Fannie and from Freddie to Freddie. We're also asking for more drive-by appraisals.
- There is a proposed bill in Congress right now to allow remote online notarizations nationwide, which would enable consumers to close on a home loan while still maintaining social distancing. New American Funding announced last week that we will allow non-notarized closing documents to be eSigned via DocuSign. I expect other lenders have enacted similar rules.
- Right now, we still need a current Verification of Employment to fund loans. If a borrower is laid off or furloughed and we need their income to qualify, we will not be able to fund their loan. I hope that we will receive updated guidance from the GSEs in the next few weeks.
This is all still very new. But lenders and investors are working diligently to provide as little disruption to the real estate industry as possible.
Tips for Staying Sane
I'm definitely not a therapist, a doctor, or a personal coach. I'm a loan officer. But these are a few things that are helping me navigate this new world in which we are living. Your mileage may vary.
- Keep a similar schedule. I think humans are wired to function well with routine. We get up at the same time every morning, eat lunch at the same time, go to bed at the same time every night. Our bodies are accustomed to a certain schedule. When we alter that schedule significantly, it puts stress on our bodies. And the last thing our bodies need right now is additional stress. So try to keep a schedule similar to your previous normal. Fine, sleep a little later. If you usually get up at 6am, get up at 6:30am or 7am. But sleeping until noon, watching Netflix all day, and falling asleep on the couch at 2:30am is only going to stress you further (assuming that's not your normal routine).
- Get outside every day. This is gonna sound a little woo-woo. But we just had the spring equinox. The world is waking up from winter. Birds are chirping, trees are budding, flowers are beginning to bloom. And people are going back into hibernation at the exact time we're wired to want to get outside. No wonder we feel stressed! No wonder it feels like this isn't normal. It's not. Get outside every day. Witness the return of spring. Feel the sun on your face. Breathe fresh air. I promise it will make you feel better.
- Shower and dress every day. We don't have to let ourselves go just because it's the apocalypse! I think that our behavior influences our minds. If we normally wear a suit & tie to work, and we sit down at our home computer in the same grungy gym shorts we've been wearing for three days, it's no wonder we don't feel like we're working. If the body leads, the mind will follow. I'm not saying you have to wear a skirt and heels to color with your toddler. But take a shower, brush your hair, and at least put on clean pajamas.
- Step away from the computer. One glance at social media and you can pinpoint who is spending too much time online. Don't do this. Do something productive each day. If you can't work from home, teach yourself to play guitar. Learn a foreign language. Pick up that old quilting project. Garden. Knit. Put together a jigsaw puzzle. Engage your mind. Do something with this time.
- Be gentle with each other. We're all on edge. We're in uncharted territory. Nobody has done this before. We're all dealing with this in different ways. We all have different fears. We all have different processes. We will be more likely to lash out, to speak harshly, to criticize. Forgive each other. Ask where we can help each other. And treat each other gently.
There is light at the end of the tunnel. We may be through this by the end of April. It might last into June or July. It's damn inconvenient but it doesn't have to be devastating. If we have to be quiet and still and wait a couple months, we wait a couple months. Let's take care of one thing at a time and take care of each other.
Stay healthy out there!
1. 3.25% interest with 1.0% discount point / 3.493% APR / purchase / owner occupied / $320,000 loan amount / 80% LTV / 740 credit score / $1393 principal & interest
2. 5.0% interest with 1.0% discount point / 5.170% APR / purchase / owner occupied / $320,000 loan amount / 80% LTV / 740 credit score / $1718 principal & interest