EVERYONE NEEDS TO READ THIS
The times
that we are in right now are unlike any other time. I pray that everyone stays
safe and that this pandemic comes to an end quickly. I pray for the successful
recovery of those who are ill.
I bet by now
every one of you knows someone who has been affected by this virus – either physically
or financially. The uncertainty in the world has caused some major volatility
in the markets.
Unemployment
is now in the millions and it will impact every aspect of our country.
We are about
to walk into a tsunami that is going to make 2008 look like a small wave and I
am here to explain why.
In the end,
I do believe, like we always do…we WILL come out of this stronger and better…but
it is the in-between time that is going to be very difficult.
For the sake
of simplicity, I am going to stick with the basics so that you understand what is going on and the implications that
follow.
I am going
to cover parts of the mortgage industry that most of you have little knowledge
of, but are hugely important.
So, let me
tell you what is happening. I will start with mortgage servicing.
Mortgage
servicers are the ones who “service” your loans. They don’t own the loans. FNMA,
FHHLC or GNMA are the ones who typically guaranty the loans and those that buy the mortgage backed securities are the ones that “own” the loans. They get sold and
then you have a servicer that collects all of the payments. They get paid a
premium to do so. Typically, the time span for a borrower to keep a home loan
has been 5-7 years before they either refinance or sell the house etc.
Except for when
there is a huge swing in interest rates…people will refinance, and the
originators will close more loans and then those new loans will go back into
the servicer’s portfolio once again. That is typically how the world has worked.
A servicers
portfolio is directly determined by where current interest rates are. The lower
the rates, the lower the value of the servicing portfolio because people are prepaying
quicker than the industry standard.
Here is
where it gets interesting…so now, not only do we have a very low and very volatile
interest rate environment, but we also have MILLIONS of people that have lost
their jobs and we are about to have MILLIONS more join them…and they are about
to stop making their mortgage payments.
The
government market is in BIG TROUBLE!! These are your first time homebuyers, people
with compromised credit, higher debt to income ratios…not a big savings, living
pay check to paycheck in a lot of instances…. They cannot survive if one the
wage earners or God forbid both of the wage
earners lost their job.
Our government
came up with a forbearance program – which means that you do not have to make
payments – HOWEVER….when you are a mortgage servicer on a government loan, the SERVICER
has to make the payments to the investor regardless of whether or not the borrower
makes their payments or not.
Can you see
where I am going with this?? So now we have servicers fronting money on a loan,
hoping that one day they get paid back! Until it goes into foreclosure…which
can take years.
There are millions
of people about to not have a job.
We are about
to see HUGE changes in government lending. Guidelines will be tightened greatly
and the pool of homeowners that qualify will decease dramatically! It is
already happening. I have seen minimum FICOs go from 580 to 680 overnight because
no one wants to take that higher risk. I expect this to continue to change
daily, much like what happened in 2007-2008.
If you are
currently in the home loan process and you fall into the lower credit score or
government loan category, I urge you to contact your lender often to make sure
their guidelines have not changed.
On a
conventional loan, the amount that the servicer has to pay when someone stops
paying their home loan is limited to one payment…on a government loan it is
UNLIMITED!!
So what we
have is a tsunami of people, all at once, about to not be able to pay their
mortgages. The govt is trying to figure out how to mitigate this and things are
happening quickly. You must understand though that this “bail out” money (for
lack of better words) being given to the servicers has got to come from
somewhere…the money isn’t going to just appear out of thin air. We will get
more into debt as a nation. It will take years to truly get through all of this.
It is important
for all of us to realize that we are in the same boat and we will navigate
through these changes together. I would expect though that mortgage guidelines
will change rapidly and we are just going to have to work through them. This
will mean less people qualifying that even the week before this and there is nothing
that we can do about it. Changes WILL happen.
Non-QM loans
– bank statement loans etc. – those are GONE overnight. Bond loans are all but
gone because no one wants to take the risk. The jumbo loan market has significantly
decreased. Things are going to change.
I have
already seen many very large companies not even let you lock a rate in until
the loan is going in for clear to close. There are other companies that have paused
all lending and closings for a few weeks. When you pair huge volatility with huge risk of even getting paid = cease of business....they are just gong to stop or pause until the roller coaster is over.
It is even
more important now, more than ever, to work with ONE person you trust versus
shopping around for the best rate. Rates are changing rapidly up and down
multiple times a day. My advice is for you to choose a loan officer and stick
with that person.
Next, let’s
talk about what it truly means to lock in a rate on a home loan…
There are 2 kinds of locks:
·
“BEST EFFORTS”
locks – basic definition is that a company locks a loan and they will do their
best to deliver that loan. If they don’t, they aren’t penalized. Most companies
don’t do this because it means that the interest rates offered to their clients
are higher and it makes them dramatically less competitive.
·
“MANDATORY DELIVERY” locks. Now, most of the big players
in the mortgage industry do this because it is a way to have better pricing
(lower rates) BUT, just like it says…the mortgage company is now obligated to
deliver that loan at the agreed upon price.
When
you do mandatory delivery, mortgage companies have built into their models a fall
out rate that is expected to happen if people walk away, cancel contracts etc…and
let’s say that that is typically 15% fallout on any given month.
So
what do they do? They hedge mortgages. Hedging in mortgage is most simply
defined as selling in the future. You lock a loan and the purchaser agrees to
buy it at a certain price. For example, a rate is locked at 4% and the buy rate
for that interest rate has an additional 3% spread built into it and that is
money for the mortgage company that is originating the loan…money use to pay
the bills and then net the rest for profit.
What
you have to understand is that this makes a mortgage company contractually
obligated to FNMA, FHHLC, GNMA or whoever to deliver the loan at that rate with
that pricing….BUT the borrower is in no way contractually obligated to us! So
they can walk if rates go lower. No consequence for them…huge consequence for
mortgage companies.
Guess
what though?? The mortgage company is still obligated to deliver that loan with
that profitability at that rate…even when there is no longer a loan to deliver.
We then have to pair off with the buyer where we give them another loan OR we
give them the difference. This is MILLIONS upon MILLIONS of dollars.
SO,
if you have a bunch of locked loans for mandatory delivery and rates fall
quickly, the mortgage company is going to lose a lot of money.
This is
going to cause problems for some mortgage companies who are not prepared.
Quick decreases
in rates is NOT good for us…for mortgage companies. The Fed buying the mortgage
backed securities is actually HURTING us because it is causing rates to go down
further in a market that cannot handle the decline because of everything else
that is going on. It messes up the hedging and potentially the only chance of profitability
that a mortgage company has.
The bottom
line is this:
This is what
I want you to think about….
First and
foremost, our health is most important…we need to get this virus under control so
that everyone can go back to work. While we don’t know how long this will last,
we just all need to work together to work through it.
I have faith
that we will come out of this and bounce back like we always have. We just have
to be smart about it. If you are getting a home loan, know that things might
change…choose your mortgage company wisely and when you agree to a rate to lock
at, stick with it for reasons that I just stated.
We are in
this together. Things are going to change. It is going to be a different world.
Jen