Investor anxiety already washed away non-QM lending March 27, 2020 By Ben Lane
It looks like borrowers who don’t fit neatly into Fannie Mae and Freddie Mac’s lending criteria could soon be running out of options if they want to buy a house.
Over the last week, many (if not all) of the biggest lenders specializing in lending to borrowers outside the Qualified Mortgage lending box paused their activities due to uncertainty in the market.
And now it appears that Federal Housing Administration lending as we know it is disappearing from the market too.
That’s not to say that the government itself is making any changes or limiting borrowers’ ability to get an FHA loan. The FHA’s loan requirements are still the same: minimum credit score of 580 for a minimum down payment of 3.5%.
But the current economic environment is forcing lenders to make changes to their FHA lending programs. And those changes are likely to make FHA lending unavailable for a number of borrowers who could have gotten an FHA loan just a few weeks ago.
Scuttlebutt in the mortgage industry over the last few days pointed to lenders raising their FHA requirements, and that’s just what appears to be happening.
In fact, it seems that many lenders are raising their minimum FICO scores for FHA loans to as high as 660, which would prevent a large section of borrowers from accessing an FHA loan.
A HousingWire investigation found more than a dozen rate sheets from various lenders scattered across the country that showed that some lenders have indeed raised their minimum FICO scores for FHA loans.
And while not every lender has raised its minimum FICO score for an FHA loan, many of the lenders have set their loan pricing for lower scores to such a level that no borrower would possibly agree to the loan.
In fact, one lender is currently stipulating that a borrower with a 580 FICO score would need to pay an additional 10% above the market interest rate for an FHA loan.
Other lenders have pricing adjustments for lower FICO score borrowers that aren’t nearly as dramatic, but the economics of even the smaller interest rate adjustments may still price some borrowers out of the market entirely.
And even for the borrowers who could qualify for an FHA loan in this environment, a number of those borrowers would be much better off financially going with a conventional loan (one backed by Fannie or Freddie).
Combine all these factors together and you have an environment where FHA lending as we know it is quickly slowing down.
So how did this happen? It’s all about the economic conditions in the U.S. right now. And the view of the borrowers in question.
Borrowers who get an FHA loan are generally thought of as riskier than “traditional” borrowers. That’s why those loans typically cost the borrowers more. Put simply, the riskier the borrower is, the more expensive their loan is going to be.
For lenders and the secondary market, it’s all about pricing the risk. They don’t want to lend to super-risky borrowers because those borrowers are far more likely to default on their loans and the lenders and investors would end up losing a lot of money per loan.
So, they protect themselves by lending only to borrowers who are more of a sure thing. But the FHA borrowers are also likely the ones who are at the most financial risk given the economic conditions in the country right now.
Case in point: There are millions of people who just lost their jobs as the coronavirus shuts down the country. And many more people are expected to hit unemployment in the coming weeks. Many of those people don’t have massive amounts of money in savings and that’s going to be an issue for them and for everyone they owe money to.
That will likely lead to massive mortgage delinquencies.
Now, the government is preparing for that and reportedly plans to offer some borrowers as much as six months of forbearance on their mortgage, but servicers are still required to advance the mortgage payments to investors even if the borrower isn’t paying. And servicers don’t have the cash on hand to supplement months of missed payments for millions of borrowers.
Here’s how the mortgage industry laid out that problem in a letter sent to federal decision-makers earlier this week: “To give one a sense of scale, if 25% of the nation receives forbearance for only 3 months, servicers will have to cover payments of roughly $36 billion. If they received it for 9 months, then the cost would exceed $100 billion.”
Those economic conditions are making FHA loans undesirable both on the front end and on the secondary market. FHA loans are securitized by Ginnie Mae along with Department of Veterans Affairs and Department of Agriculture loans. And those securities and the mortgage servicing rights that go with them are viewed as too risky for all parties involved right now.
Now, things could change quickly. Servicers are supposedly eligible for funding from the Federal Reserve as part of the coronavirus relief effort. That money could float the months of missed mortgage payments that are about to start hitting.
But in the meantime, there’s a lot of uncertainty. And because of it, FHA lending is slowing down considerably. How long that slowdown lasts is a question that no one can really answer yet.
This article explores the government response to homeowners and renters unable to make housing payments due to the recent coronavirus (COVID-19) outbreak. Whether or not the coming months will result in a foreclosure or eviction crisis will be up to the government’s efforts to keep individuals housed during this time of reduced and eliminated incomes.
The economic impacts of COVID-19 are still emerging
The global conflagration of pandemic, market crash and recession is shaking California’s economy to its core. No sector is left untouched, and residential and commercial real estate markets are already feeling the repercussions.
California’s governor has ordered nearly all 40 million of the state’s residents to shelter in place. However, on top of businesses closing, jobs lost and hours being reduced, millions will soon find themselves unable to pay their rent or mortgages.
Roughly 20% of the state’s working population is employed in an industry that has been essentially shut down by COVID-19. For example, the retail, tourism and hospitality industries regularly employ roughly 3.5 million individuals across California. Further, the workers employed in these industries have some of the lowest-paying jobs, thus ensuring few have sufficient personal savings to support the continuing weeks of unemployment.
To shelter in place, homeowners and renters will need to keep their homes, even when they won’t be able to make their housing payments. In the short term, Governor Newsom has authorized local governments to:
halt renter and homeowner evictions;
slow foreclosures; and
protect against utility shutoffs.
But how these protections actually play out is left in the hands of local governments (read about how Los Angeles and San Francisco are instituting these bans here).
At the national level, Fannie Mae and Freddie Mac have suspended foreclosures and evictions for at least 60 days. Further, the agencies will allow mortgage forbearance — allowing homeowners to reduce or suspend payments — up to 12 months for homeowners under economic hardship due to COVID-19. During the forbearance period, homeowners won’t be charged late fees or have their delinquent payments reported to credit agencies.
However, what happens at the end of the 12-month forbearance period is still up in the air. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, states additional assistance may be available to those who cannot “catch up” at the end of the relief period, though homeowners will need to work with their mortgage servicers to hash that out.
Expect to see more FHFA guidance in the months ahead as the number of mortgages in forbearance grows. While most mortgages are backed by the agencies, the FHFA also expects other non-government backed mortgage lenders will soon introduce similar forbearance rules to ensure relief to all mortgaged homeowners.
In the meantime, real estate professionals can encourage their clients facing economic hardship due to COVID-19 to contact their mortgage servicers. Keep in touch with these clients and stay informed of their outcomes so you can remain informed, and in case you can be of assistance if they end up needing to list their home or complete a distressed sale.
Housing during a prolonged economic crisis — and pandemic
With the outsized impacts to the housing market that came with the 2008 recession, you are probably wondering about the potential for another deluge of distressed sales, like foreclosures, short sales and real estate owned (REO) properties.
How many distressed sales will hit the market in the coming months will depend on the answer to two questions:
what will happen to home prices during this recession; and
will the federal and state governments step in to halt foreclosures over the many months to come of reduced and eliminated incomes?
As to home prices, normally, a reduced home sales volume (less demand) directly translates to lower home prices. After over a year of declining sales volume, California was already in line for a price correction. Now, with the pandemic keeping people at home and panic sealing shut homebuyers’ wallets, sales volume will plummet.
However, today’s dramatically low interest rates are complicating this dynamic by acting as a stimulus for home prices. But low interest rates can only go so far — many homebuyers who were qualified last month have lost their jobs this month. How far the boost from low interest rates will carry home prices depends on just how low interest rates will go.
Right now, the Federal Reserve’s (the Fed’s) target benchmark rate is at zero and the 10-year Treasury Note is hovering near historic lows. The Fed is also purchasing mortgage-backed securities (MBS) to support the mortgage market. The only way FRM rates will go lower is for lenders to accept a lower margin — which is unlikely, as they are currently padding their margins in anticipation of a deep recession — or for the Fed to make the unprecedented move to go negative.
If the Fed goes negative in 2020, lower FRM rates are assured, which will continue fueling the boost to home prices. This will stave off a steep reduction in home values and a corresponding increase in underwater homes.
On the other hand, if home prices drop in accordance with the severity of the housing market’s slowdown (or perhaps better stated, the housing market’s abrupt stop), negative equity will rise. Underwater homeowners who need to sell will find short sale or foreclosure their only option.
But that’s where the government’s forbearance plans come in. When homeowners are allowed to remain in their homes despite being unable to pay, they won’t be forced to accept a distressed sale option.
Real estate professionals to feel the pinch
How will COVID-19 impact the state’s 300,000+ individuals employed in the real estate and rental/leasing industry?
As 2020 progresses, sales agents and brokers will find themselves with fewer transactions — and fees — to go around. Further, when home prices decline, the fees earned will be smaller. The result will be reduced income for all practicing agents and brokers. Many will drop out of the profession altogether (though the options for other job openings at the moment are slim).
However, creative and proactive agents will find ways to supplement their lost income by taking actions like:
adding a mortgage loan officer (MLO) endorsement to their Department of Real Estate (DRE) license to assist in refinances at today’s low rates;
adding a notary public license to their toolbox;
becoming a property manager;
studying property investment strategies like forming real estate syndicates; and
preparing for distressed sales.
An evolving forecast
Going into 2020, economists were forecasting a regular business recession. On top of that, the economist Paul Krugman recently likened the economic impact from the COVID-19 pandemic to the fallout from a natural disaster.
We are in the middle of a unique, global economic moment and the end result is still out of reach. Real estate professionals need to keep a close eye on the situation and communicate developments to their clients. This includes tracking:
offers of mortgage and renter assistance as they unfold at the local and federal levels;
the direction of interest rates; and
local home values along with the number of underwater homes.
After plunging into Friday’s close, US equity futures markets are extending losses at the open after President Trump extended the virus guidelines (lockdown) until April 30th.
Dow futures have erased most of Thursday’s surge gains…
But oil was the big mover as WTI plunged as much as 7.5% to a $19 handle…
10 ways to keep in touch digitally while under lockdown
That is the lowest since early 2002…
The kingdom said on Friday that it hadn’t had any contact with Moscow about output cuts or on enlarging the OPEC+ alliance of producers. Russia also doubled down, with Deputy Energy Minister Pavel Sorokin saying oil at $25 a barrel is unpleasant, but not a catastrophe for Moscow.
Last week was the wildest in the history of the mortgage market. This week was wilder. It ended with a one-of-a-kind show of force from the Federal Reserve.
This wasn’t necessarily destined to be the case, but things changed dramatically on Wednesday. By then, rates were surging higher for reasons that were hard to comprehend. True, the Fed cut rates in an emergency announcement over the weekend, but we’ve already talked about why the Fed rate cut doesn’t affect mortgage rates.
The mortgage market was far more interested in the Fed’s decision to start buying large amounts of mortgage debt for the first time in years–something that has absolutely made a difference in the past.
This time, it was no use–at least not at first. Mortgages celebrated briefly on Monday but quickly became inconsolable as the week progressed. Their biggest issue was a massive glut of supply.
Supply and demand are key considerations for the price of anything. Mortgages are no exception. Higher supply (of mortgages) means lower prices paid by mortgage investors. Lower prices mean higher rates for consumers. If that doesn’t sound logical, remember, that’s the price an investor is paying to be able to collect interest on your mortgage. The less they pay, the more you’ll have to.
Recent market volatility and the rapid-onset recession (courtesy of COVID-19 shutting down large portions of the economy) drove a mass liquidation of mortgage debt among certain bond holders. Investors were eager to shed risk and raise cash. This was especially true for several key sectors of the mortgage market. That meant selling mortgage debt… a lot of it!
In fact, the amount of supply was too much for the Fed to handle. Other mortgage investors may have been able to pick up the slack, but they were conspicuously absent, and not just because they wanted to raise cash. They were also protesting uncommonly high volatility brought about by the rapid decline in rates in recent weeks. Excess volatility hurts mortgage valuations, making investors want to offer lower prices.
The net effect was a scary situation where the Fed was throwing money at a mortgage market that not only seemed unwilling to respond, but that was also showing signs of serious distress. The mainstream data (based on a weekly survey of rates) isn’t able to capture the fallout, but the following chart shows just how much damage was being done to mortgage rate availability day-over-day.
In an attempt to put all this nonsense to rest, the Fed blasted the mortgage market with a surprise announcement on Thursday. By the end of that day, it would buy more mortgage debt than it had ever bought in a single day. Surely, this would do the trick!
But no… Mortgage bond holders had more paper to get rid of, and potential buyers were even more reticent than imagined. Despite bringing out the big guns, the Fed appeared to be losing control of the mortgage market.
Then the Fed got angry. And you would probably like the Fed when it’s this angry.
Remember the Fed’s biggest-ever day of mortgage buying on Thursday? By Thursday afternoon, it announced the following day would be THREE TIMES bigger. By Friday morning, when the mortgage market wasn’t responding enthusiastically enough, the Fed unleashed its fury, adding another $15 billion dollars of purchases, making it FOUR TIMES bigger. In case that left anything to doubt, the Fed announced it would be back on Monday to do it all again.
This was an astonishing and brutal display of power, the likes of which had never been brought to bear on the mortgage bond market, or even thought possible. If it didn’t do the trick, it’s hard to imagine what more the Fed would have done to regain control.
Thankfully, we won’t find out. Friday afternoon saw a restoration of the strong buying demand for mortgages and the defeat of relentless selling pressure. Simply put, the forces of good (the ones that push mortgage rates lower) prevailed.
This isn’t an instant fix for mortgage rate volatility, and it hasn’t immediately restored the availability of recently low rates. But the bonds that underlie the mortgage market are moving quickly in the right direction. If that continues to be the case in the coming weeks, rates will continue moving back toward those recent lows, creating significant opportunities for those who missed out earlier this month.
A constant COVID-19 caveat is required. The world is, of course, rapidly changing and many aspects of our lives are in upheaval. It’s impossible to predict every twist and turn in the road ahead for the economy and the mortgage market. Regulators and service providers are working to adaptto the rapidly changing situation. Borrowers and loan originators need to have open conversations about those changes and what to expect during the loan process.
On a final note, it goes without saying that there are trying times ahead and fear is rampant. Let’s all be looking for ways to help each other and ask for the help we need. Let’s meet fear with courage, patience, hope, and kindness.
I will do my best to speak to both consumer and mortgage industry people on this topic. It affects everyone. With that in mind, the following is a list of questions that loan originators have been asking. Consumers might not be familiar with all the terms, but the rest of this article will speak to everyone.
Why are so many non-QM lenders raising rates or disallowing new apps?
Why can’t I do cash-out non-QM or Jumbo right now? Or Non-Owner, high LTV, low FICO?
Why are my FHA/VA rates suddenly terrible?
Why am I suddenly seeing MASSIVE hits for certain FICO/LTV combinations?
Why am I suddenly hearing more than I’ve heard since 2008 about lenders potentially being in trouble?
Why are lenders changing rates MASSIVELY from day to day?
Why are different lenders so far apart from one another in terms of what they’re quoting?
The mortgage industry, like many others, is dealing with more than one problem right now. And like many other industries, the problems arose from the fastest-ever economic adjustment the world has ever seen–not from some inherent wrongdoing or mismanagement. So if you hear someone comparing 2020 to 2008 and implying the mortgage market is bad or evil in some way, they’re misguided. People love to freak out about serious stuff. And stuff is indeed serious.
This is a multifaceted issue with two main components:
The general market disruptions brought about by coronavirus and
The impending mortgage market consequences from the soon-to-be-passed disaster relief bill (which is unfortunately also referred to as “the stimulus bill”).
Part 1. General Market Disruptions Brought About By Coronavirus
If you really want to do some reading, my newsletters lay a good foundations for this. Here’s the most recent one. You’ve already heard about the massive stock losses in Feb and March. This coincided with massive bond market gains. Mortgages are part of the bond market and gains typically mean lower rates.
In fact, the bond market improved so much so quickly that it was too much of a good thing for the mortgage side of the bond market. “How could rates be too low?!” you may be wondering.
Investors who buy mortgages are planning to make money on interest paid over time. They pay extra upfront for the right to collect that interest. If the loan is paid off earlier than they expect (due to rapidly falling rates and refinances), they either lose money or simply make much less than they expected. As long as the risk of rampant refi demand remains high, lenders remain hesitant to pay what they normally would for mortgages. This makes rates go higher or stay flat even as other long-term rate indicators, like 10yr Treasury yields, plummet to all-time lows.
In fairness, mortgage rates made it to all-time lows too, but not nearly as convincingly as Treasuries. Moreover, those low rates resulted in the biggest-ever weekly jump in refinance demand, and remember, that’s not good for mortgage valuations (and thus not good for rates). In addition to mortgage investors pulling back due to refi fears, the entire financial market was frantically trying to sell everything it could in order to raise cash.
This isn’t “raising cash” in the sense of drumming up funding for some new venture. This is a repositioning of assets in response for a crisis. Stocks, bonds, whatever… All of it carries some degree of risk and none of it can be used as day-to-day capital the same way as cash. Massive global economic and financial market emergency? Investors start acting like this guy from The Fifth Element.
The cash grab and the refi fear meant mortgage investors had 2 big reasons to sell, and again, when they’re selling, rates are rising. This is why mortgage rates jumped higher at the fastest pace in history 2 weeks ago, even as 10yr Treasury yields remained at levels that convinced many savvy borrowers that mortgages should be doing much better.
A market phenomenon known as a “margin call” added to the volatility in the mortgage market especially. This refers to big lenders and their trading partners constantly trying to settle up their ledger with one another in order to maximize cash in hand. When bond prices are falling quickly, it’s the lenders that are demanding cash from dealers. The bigger the move in bonds, the bigger the demands on the cash of the entities responsible for providing mortgage financing.
All of the above added up to a major threat to the bond market’s ability to provide credit. That’s a complicated way of saying people and businesses and banks were at risk of not having the cash they would otherwise be accustomed to. Let’s say you remodeled your home with a credit card and then were expecting to quickly get a refinance to pay off the debt, but due to the cash crunch in the bond market, your loan was heavily delayed or not possible at all. You’d now be looking at a few high interest payments at the very least. Maybe that’s no big deal to you, but multiply it by the size of the entire financial system and it adds up.
This is precisely why the Fed stepped in with hundreds of billions of dollars of bond buying guarantees and trillions of dollars in short term loans to the biggest banks. Don’t think of these loans like “printing money.” They merely provide a quick and easy way for big banks with a ton of assets to turn those assets into cash without trying to get that cash from other banks who are also trying to get cash. This gives banks time to do what’s necessary in order to repay the cash to the Fed and reclaim the assets they initially put up for collateral (jargon term for all this = repurchase agreement or “repo” for short).
The unfortunate consequence of the Fed buying massive amounts of mortgage bonds was that the margin call issue started to go the other way. Now, instead of mortgage lenders seeking cash from the bigger players, the bigger players were owed cash from mortgage lenders. This exacerbated the problem discussed in part 2.
Part 2: The Disaster Relief Bill is a Disaster For The Mortgage Market
To be fair, it’s not just the bill, but rather an underlying problem it fails to address. 3.3 million people filed for unemployment this week. More are on the way. Many of them will not be able to make ends meet. Some of them will sell their homes, refi for a lower payment (if they can qualify without their previous level of income), or in the worst cases, default on their payments. Mortgage investors are protected from the loss of interest and principal in the event of default in most cases, but defaults nonetheless cause the same valuation issues as a refinance. And remember, rapid refi demand makes investors less interested in buying mortgage debt.
Now consider the disaster relief bill. It encourages millions of Americans affected by coronavirus-related income disruptions to seek a forbearance on their mortgages. This means no payments for 6 months at minimum. That, in and of itself, is a great thing for homeowners. It provides relief when it’s needed most. There are some serious, unintended consequences, however.
The investors who buy mortgages have a guarantee to receive timely payments. If the homeowner can’t pay it, the loan servicer is supposed to. If the servicer can’t pay it, the housing agencies (Fannie, Freddie, Ginnie) foot the bill. And finally, if the agencies can’t pay, taxpayers foot the bill because Treasury will have to provide a “draw” for the agencies.
As the bill was written by the House, it stated that The Fed and Treasury would extend credit to mortgage servicers that needed it due to COVID-19-related delinquencies, defaults, or forbearances. The bill passed by the Senate (and sent back to the House) has no such clause, nor any protections for servicers or GSEs. While there is reason to believe that a section of the bill could/should still cover servicers in need, the absence of a concrete promise has many of them understandably cautious.
Beyond that, even if servicers are ultimately covered by a Fed credit facility inside or outside of the disaster relief bill, the fact remains that forbearances make loans less profitable for a variety of reasons. Before you pound your fist and curse the evil banks for only caring about profit, that’s not at all what I’m saying. Lenders WILL continue to offer financing to people who need it. But at the moment, it’s very hard for them to know how to assign cost/value to the riskier edges of the mortgage market credit spectrum.
In other words, if you need a big loan without much equity, a low credit score, and non-standard income documentation, you might find such programs completely unavailable or simply priced too poorly to make sense. Investors are not interested in owning such debt until they get more clarity, both on the containment of coronavirus and the ability of servicers to keep payments flowing in a timely way.
Even more normal parts of the mortgage market are suffering because of how they’re expected to fare during the COVID crisis response. FHA/VA loans are an examples. This has to do with rules on how servicers pay investors. In general, the average FHA/VA loan is on the hook for a larger percentage of the monthly payment than the average conventional loan. Investors could also be feeling more cautious about borrower demographics in FHA, where first time homebuyers with lower cash reserves may be less able to weather a financial storm. If that makes those borrowers more likely to seek forbearance, it raises questions for investors that don’t have concrete answers in the stimulus bill.
The Bottom Line
Any loan that’s not right down the middle of the conventional spectrum raises questions about how it will impact lenders as they navigate what is easily the largest and fastest surge of forbearances the mortgage market has ever seen. Every loan raises questions. Due to their servicing rules or risk profiles, some loans raise more questions than others. Those loans have been absolutely demolished by an absence of investor demand. To reiterate, lower demand among investors = higher rates.
In essence, despite extraordinarily high prices on the bonds that underlie the top tier mortgage debt, much of the mortgage market is broken by the volatility and uncertainty surrounding COVID-19. Some parts will heal quickly as bondholders better understand their forbearance protections. Other parts will face a tougher road due to the impending recession (high LTVs especially). In all cases, TIME and STABILITY (in markets, the economy, and epidemiology) will be required before rates and product offerings return to where they were.
I devoted years of my life championing the cause of educating mortgage originators on the realities of MBS price movement. The most compelling call to action came during the meltdown where MBS told a story that wasn’t being told by Treasuries.
Everything changed after the Fed stepped in with a giant syringe full of bond volatility’s favorite sedative: QE. The final straw was QE3 which specifically targeted MBS buying in September 2012. At the time, and ever since, I declared that to be proof positive that the Fed “gets it” with respect to mortgage performance vs benchmark rates and that it was proof positive that they wouldn’t let spreads slide away into oblivion ever again.
The end of 2012 was the last time I would need to go into much detail to explain MBS vs Treasuries for years. Sure, there were a few spats of bigger movement where we talked about how MBS and mortgage rates can lag an initial spike in Treasuries, but even then, mortgage rates were moving in the same direction as Treasury yields and the latter could be used exclusively to track trends and identify both intraday and bigger-picture inflection points.
The utterly massive market response to coronavirus quickly reintroduced a focus on MBS prices. In fact, this was already the case as early as August 2019 as Treasury yields moved lower far more quickly than mortgage rates. MBS were obviously having a terrible time adjusting to the precipitous move in the bond market and were also plagued by heavy issuance (higher supply putting downward pressure on prices). Once again, it was easy to lean on MBS underperformance as a way to explain why mortgage rates weren’t lower than the overall bond market would suggest.
Now here we are with prices on 2.5 coupons trading over 104! That’s a milestone few saw coming–at least not this soon. It’s an absolutely staggering price–a record high and then some. Clearly, then, if MBS prices are higher than they were in 2012, rates should be lower than they were in 2012. BUT NO! At least not in a consistent way and definitely not for every lender. The reasons for this were explained in great detail in this post yesterday.
We’re going to need clarity on how the mortgage servicing market and the agencies will access Fed/Treasury capital to maintain capital buffers and payment consistency to bondholders. That was going to be part of the relief bill, but now it’s supposed to come in a separate heads-up from the Fed after the bill passes. Either way, we should expect lender pricing to defy MBS logic in many cases until the mortgage market gets a better sense of how it should value risk going forward.
I would like to say that 30yr Fixed UMBS would be the least affected here, and that’s true for many lenders, but at this very moment, some lenders are looking at much more risk than others even in that purest of vanilla spaces due to the way they fund loans. Some c30 servicers will be on the hook for bothprincipal and interest payments through to bondholders plus escrows to the respective entities (we’re talking about a forbearance situation here)--full PITI no matter what the borrower is paying. Other servicers are only on the hook for ITI.
This is one of the reasons some c30 lenders suck right now while others are near record lows. It’s also a big reason that FHA/VA have been hit so hard. They’re in that full PITI camp. They’re also in a demographic that’s less able to soldier through COVID-related financial stress (more 1st time buyers, fewer assets on average, lower FICO on average, much higher LTVs on average).
And it’s ALSO the reason that anything other than Fannie/Freddie/Ginnie is doing even worse. Although the relief bill doesn’t obligate those lenders to offer forbearances, it also doesn’t offer any protections for them when their borrowers are unable to pay.
One of the more unorthodox measures implemented by No. 10 Downing Street when it placed the entire UK on lockdown earlier this week was a virtual freeze of the country’s housing market. For nearly a week now, the housing market across the country has ground to a halt as agents have been prohibited from marketing new homes.
And on Thursday, the government took things a step further, and banned visitors from viewing properties while the “stay-at-home” measures are still in force.
The edict affects all transactions, blocking all transfers of title until further notice, while also banning evictions, it’s basically forcing the entire county to stay put in whatever housing situation they have been living in. For those who don’t have permanent housing arrangements, it’s presumably been a struggle. But that’s a relatively small slice of the population.
This is about all prospective homebuyers in the UK can do right now:
“You can speak to estate agents over the phone and they will be able to give you general advice about the local property market and handle certain matters remotely but they will not be able to start actively marketing your home in the usual manner,” the government said on Thursday night.
A number of banks and specialist lenders have already withdrawn new mortgages to “focus on existing customers”, even as demand for loans is expected to soar. The decision was meant to reduce stress on call centers as most places are expected to be low on staff in the coming weeks.
Lloyds and Barclays have already withdrew most of their mortgage offers, and are expected to cut off all loans currently in the process of being made unless the borrower can put down 40%.
Barclays told brokers it would no longer offer mortgages for customers who did not have a deposit of at least 40%, but it would continue with some remortgaging deals.
With so much uncertainty and such extreme fluctuations in interest rates and credit markets, banks are hoping to put things on pause until things have calmed down a bit.
Bankers told the FT that the withdrawal of mortgage products wasn’t a signal that they were running short of financing, as happened in 2008 when funding markets froze.
But with so many borrowers warning lenders to expect delays on their mortgage payments until the federal stimulus checks have been issued, issuing new mortgages right now would almost be stupid. To continue lending money at a time when reliable borrowers are already having trouble doesn’t seem to make sense, which is one problem that the government is going to need to solve with this bailout,
Today was the most volatile day in the history of the mortgage market in many regards. There were days in the early 80’s that saw rates move by similar amounts, but none of them saw the underlying market for mortgage bonds move back and forth by such gigantic amounts. What does this mean for you and your ability to buy or refi at the rates you may have heard about recently?
That depends on the rates you’ve heard about recently! Many borrowers mistakenly believe the Fed’s recent rate cuts mean that mortgage rates have fallen by an equal amount. In fact, many loan originators report getting calls about 0% rates. Unequivocally, there are no 0% mortgage rates! If you’re not 100% sure about why that’s the case, please read this article.
If you’re participating in a more realistic reality, you may have heard about some exceptionally low rates nonetheless. You may have even discussed these rates with your mortgage professional of choice. For flawless scenarios and depending on the details, fixed rates in the low 3% range were a thing for a few hours of a few days recently. That’s no longer the case–not even close.
Unless you make a habit of watching real-time bond trading it’s hard to convey just how INSANE the past 2 weeks have been. I’ll put it this way, by Friday of last week, after watching this stuff for nearly 2 decades, I was sure I’d just witnessed the craziest day for mortgage bonds (the stuff that dictates most of the movement in mortgage rates) that I’d ever seen or possibly would ever see. As of yesterday, this week was already crazier and today took it to another level. Today ALONE, as one individual DAY was more volatile than the entirety of last week! And by a wide margin at that.
Today alone, we saw a mortgage bond trading range that was as wide as last week’s. Moreover there were 5 massive changes in the direction of movement. To oversimplify, the cost of any given mortgage changed massively, 5 times today. In more normal times, this would mean that your available rate went up or down massively, 5 times today. The reality is that most lenders began the day quoting significantly higher rates than we’ve seen recently, and the average change only made that rate much MUCH higher.
The Fed cut rates to zero. They announced massive bond buying. Stocks have been tanking (which is usually good for rates). And you’re telling me, after all that, mortgage rates are significantly HIGHER?!
Yes… I’m absolutely telling you that. I track the rates of more lenders more closely than anyone you’ve talked to. These past 2 weeks and especially today have been the biggest, most counterintuitive messes I could have ever imagined. The mortgage market is in absolute CHAOS! Regular readers will know I’m not prone to all-caps diatribes and excessive exclamation points. To whatever extent I’ve actually been able to take the time to write articles this week, the ratios of all-caps and exclamation is through the roof.
Why is the mortgage market in chaos? There are complex reasons and simple reasons. First off, this isn’t 2008. If any lenders end up struggling to survive this environment, it won’t be for the same reasons as 2008 and the systemic risks are a non-issue. To be sure, there is tremendous stress in financial markets, but whereas the mortgage sector CAUSED the problem in 2008, it’s more of an innocent bystander this time around.
Coronavirus has created an unprecedented situation for the entire rates market (not just mortgages, but US Treasuries and everything else). Relative to some classes of bonds, mortgage rates aren’t seeing nearly as much drama, in fact. Liquidity is one major issue. That refers to the ability to buy or sell whatever you want to buy or sell at the price you’d expect. It also refers to the ability to liquidate whatever you need to sell in order to raise CASH.
AND GUESS WHAT HAPPENS WHEN EVERYONE AROUND THE WORLD SIMULTANEOUSLY DECIDES CORONAVIRUS IS A HUGE DEAL?
Everyone wants cash. Before you run out to the bank to try to beat your neighbor to the ATM, I’m not talking about green cash. That won’t do you any good in the zombie apocalypse anyway. I’m talking about a cash position in financial markets–the most liquid, nimble place an investor in the US can be. Outside of situations where the value of the American dollar is rapidly deteriorating, there is no other asset that offers a better combination of immunity from risk and liquidity/flexibility. So when no one knows what in the world is going to happen next with the rapid-onset recession (something that’s already begun, even if economic reports will take months to confirm it), cash reigns supreme.
Investors are selling mortgage bonds hand over fist for cash. They’re selling lots of other stuff for cash too. Investors that would typically buy mortgage bonds are either not in a position to buy at all, or are simply not willing to buy for the prices being charged (i.e. no liquidity). Lower prices for mortgage bonds = higher rates.
This phenomenon really began last week, but the Fed threw a big wrench in the works last Sunday with its emergency announcement. For the first time in years, they jumped back into the business of buying mortgage bonds outright (something they’d previously said there were not interested in doing again). You can take the Fed at their word there. They would NOT be buying mortgages if there wasn’t serious funding stress in the mortgage market. Again, this funding stress isn’t resulting from mortgages being bad or “toxic” in some way. If you hear any mentions of that, it’s nonsense.
The issue, again, stems from the supply and demand situation being completely unprecedented. Just like panicked masses suddenly buy toilet paper despite not planning on using the restroom any more than normal, the herd mentality in financial markets is to buy nothing and sell everything (except for the talking heads that attempt to convince people it’s a good time to buy stocks amid a freefall–a broken clock strategy that is wrong again and again until it’s finally right). Things were so intense at one point today that the Fed had to announce major additions to its previously announced schedule of MBS buying.
NOTABLY, the Fed is not doing anything it said it wouldn’t do on Sunday afternoon. In fact, it purposely left open the possibility to add additional buying as needed to support the normal functioning of the mortgage market. And therein lies the heart of the matter. Mortgage markets progressively freak out (other markets too), and the Fed continually steps up to offer reassurance. Its will is strong and its tools are capable in this regard. When the reassurance is first announced, markets move in the opposite direction from “freaked out.” In the case of mortgages, this would normally mean “lower rates,” but in the current case, it’s only allowing lenders to temporarily stop the bleeding.
EVENTUALLY, this song and dance of market panic and Fed reassurance will level-off. There is absolutely a limit here. But this is also absolutely a major adjustment for financial markets. We’re suddenly faced with a totally unexpected need to radically revalue nearly every asset class faster than it’s ever needed to be done, and with less certainty about how to do it. No one knows what the supply and demand for mortgage bonds, let alone anything else (except maybe toilet paper?) will look like in a few days, weeks, or months.
While we can logically conclude that a massive economic recession should coincide with very low rates, there’s too much uncertainty and too great a need for short-term cash for rates to simply drop to the levels we may eventually see. As for how long it takes rates to get back to where they “should” be, it’s impossible to know. Until last week, I would have said “days.” Until today, I would have confidently said “weeks, at worst.” I’m getting increasingly hesitant to pin a timeframe on it. After all, the sudden shift in reality versus expectations is at the heart of the issue for financial markets. The safest bet at this point is to conclude that we haven’t seen the last of mortgage rates near the recent all-time lows. We don’t know exactly when we’ll see them again. The best case scenario is quite palatable and the worst case scenario is something we don’t even want to consider–exactly like the range of outcomes when Coronavirus became a household name weeks ago.
Bottom line: rates are as high as they’ve been in NEARLY A YEAR. If you’re seeing a news article that references Freddie Mac’s weekly survey, it’s based on data that stopped being relevant on Tuesday. A lot has changed since then
Citadel Servicing Corporation (CSC) has announced that it will halt loan originations for the next 30 days. The company is also implementing a 30-day stay-at-home policy for employees in many of its departments. “This decision was made with great deliberation, taking into consideration Federal, State, and local officials’ guidance, your health and safety, and the health and future of CSC,” the company said in a statement. CSC stressed that it is not terminating or shutting down operations. “We have a strong balance sheet and are not experiencing credit or liquidity issues,” the California-based lender said. “Instead, we are making this business decision out of an abundance of caution, in order to comply with California Governor (Gavin) Newsom’s Executive Order, and recognizing the in-person interactions at loan closings and in the origination process. Current conditions require reconsidering these interactions.” CSC said that despite the pause in originations, it plans to fund purchase loans intended for primary occupancy transactions that are currently in its funding department with issued closing documents. The company said it would also extend and honor conditional loan approvals for applicants who continue to qualify when origination operations resume. “We value our relationships and regret that this may be a burden in this difficult time for all of us,” CSC said. “CSC plans to fully resume normal operations after 30 days or as conditions permit. We will be back, and with your continued support, stronger and better than ever.” CSC is the latest leading non-QM lender to temporarily halt originations in the face of the COVID-19 outbreak. On Monday, Angel Oak Mortgage Solutions announced a two-week pause in originations.
$14 Billion Commodity Broker Facing Crushing Margin Calls After Mortgage Hedges Go Wrong by Tyler DurdenTue, 03/24/2020 We warned last week that, despite The Fed’s unlimited largesse, there is trouble brewing in the mortgage markets that has an ugly similarity to what sparked the last crisis in 2007. For a sense of the decoupling, here is the spread between Agency MBS (FNMA) and 10Y TSY yields… At that time, WSJ’s Greg Zuckerman reported that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale. “In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning. Well, they are not alone. As Bloomberg reports, the $16 trillion U.S. mortgage market – epicenter of the last global financial crisis – is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Fed to intervene. But, as we previously noted, it is too late and too limited (the central bank is focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government). And the aftershocks of a chaotic rush to offload mortgage bonds are spilling over to regional broker-dealers facing mounting margin calls. Flagstar Bancorp, one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans. One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.” Things escalated over the weekend, according to Bloomberg, when some firms rushed to raise cash by requesting offers for their bonds backed by home loans. “I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.” And now, commodity-broker ED&F Man Capital Markets has been hit with growing demands to post more capital to cover souring hedges in its mortgage division, according to people with knowledge of the matter. The requests are coming from central clearinghouses and exchanges, forcing the firm to put up almost $100 million on Friday alone, the people said, asking not to be identified because the information isn’t public. ED&F, whose hedges exceed $5 billion in net notional value, has been in discussions with the clearinghouses and has met all the margin calls, one of the people said. As a reminder, ED&F Man Capital is the financial-services division of ED&F Man Group, the 240-year-old agricultural commodities-trading house.
It has about $14 billion in assets and more than $940 million in shareholder equity, according to the firm’s website. Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates. “The Fed is going to do whatever it takes to restore normal functioning in the market,” said Karen Dynan, a Harvard University economics professor who formerly worked as a Fed economist and senior official at the Treasury Department. “But we need to remember that the root of the problem is that financial institutions and investors are desperately seeking cash, so in that sense the Fed’s announcement is not everything that needs to be done.” All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…