• Louis Baca

May 2020 Market Update

GOVERNMENT SPONSORED DEFAULT In a poorly thought out, knee jerk reaction to COVID-19, the federal government implemented the CARES Act. The Act allowing homeowners, with no evidence of harm or hardship, to stop paying the mortgage payment. In just over one month, 5.6% of all conforming loans (Fannie & Freddie), 8.9% of government loans, and 5.7% of privately held loans are now in forbearance. These numbers are rising fast, and likely will for the foreseeable future. As of April 19th, 7% of all mortgages were in forbearance. That is a staggering 2.6 million homeowners not paying their mortgage payments. Remember, this is just the beginning. Ginnie Mae and FHFA currently have different plans to help cover forward payments to investors from servicers on loans that have gone into forbearance. Even with the safety net in place for the servicers, they will still have billions of dollars of exposure.

“Having a four-month end date on the period in which servicers need to advance principal and interest payments on behalf of homeowners in forbearance is extremely helpful to our servicing clients,” Black Knight CEO Anthony Jabbour said. (referring to FHFA’s plan)

“Still, even knowing that time limit, with today’s number of forbearance plans, servicers are still looking at more than $7 billion dollars in advances over those four months,” Jabbour continued. “And the forbearance numbers are climbing steadily, day by day. Clearly, this remains a challenging situation all around.” – To put things in perspective, during the Great Recession of 2008, it took two years for the number of mortgage defaults to hit the numbers seen in 2020, in just one month.  Unemployment numbers nearing Great Depression levels, 26.5 million+ Americans are now unemployed. As this number inevitably climbs, so will those in forbearance; including all those that can pay their mortgage and will not.

FHFA’s FORBEARANCE BANDAID In response to COVID-19, the federal government caused the forbearance catastrophe; and now they should solve it. The CARES Act broke the essence of home lending, by allowing homeowners the ability to stop making their mortgage payments, without proof of hardship, and prevented the investors/lenders the ability to protect their asset (i.e. foreclosure), and further shifting the liability to the servicers (who you pay your mortgage to) for those mortgage payments when the borrower ceases payment. If the homeowner does not make the payment, the servicer does. Overnight the CARES Act destroyed the fundamentals of the mortgage industry which has allowed so many to share in the American Dream of homeownership.

Would you want to own an asset with a high likelihood of default in which you had no recourse; and you were on the hook for the payments when the borrower did not pay? U.S. Mortgage Backed Securities, which used to be viewed as safe as an investment as U.S. treasuries, overnight became toxic. After massive pressure from the mortgage industry, Mark Calabria, the head of FHFA, finally caved to the pressure and offered a Band-Aid for investors who fund conforming loans; those loans insured by Fannie Mae and Freddie Mac. Far short of what the industry was begging for.

“Due to the COVID-19 pandemic, some borrowers have sought payment forbearance shortly after closing on their single-family loan and before the lender could deliver the mortgage loan to the Enterprises,” the FHFA said in a statement.

“Mortgage loans either in forbearance or delinquent are ineligible for delivery under Enterprise requirements,” the FHFA continued. “However, today’s action lifts that restriction for a limited period of time and only for mortgages meeting certain eligibility criteria. Eligible loans will also be priced to mitigate the heightened risk of loss to the Enterprises from these loans.” 

According to the GSEs, the companies will only be buying loans that go into forbearance after the loan closing but before the loan is sold to the GSEs. Additionally, the loans in question can be no more than one month delinquent.

Put more simply, the GSEs will only buy loans that go into forbearance within one month of the loan closing. 

Beyond that, the GSEs are also only buying loans in early forbearance for one month. According to the GSEs, the policy only applies to mortgages with closing dates on or after Feb. 1, 2020, and on or before May 31, 2020, and settlement dates on or after May 1, 2020. In other words, the GSEs will begin buying these first-payment forbearance loans on May 1, 2020, for loans with notes dated Feb. 1, 2020, through May 31, 2020.  

Loans in forbearance with closing dates after May 31 will not be eligible for purchase under this new policy. 

The policy also only applies to purchase loans or a “no cash-out” refinance. Cash-out refis are not eligible.

But perhaps most notable of all the policy stipulations is how much it will cost lenders to sell these loans to the GSEs.

According to the GSEs, they will charge a loan-level price adjustment of 500 basis points (5%) for loans where the borrower is a first-time homebuyer. For all other loans, the GSEs will charge 700 basis points (7%).

That means it will cost lenders either 5% or 7% of the loan’s value to sell the loan in forbearance to the GSEs. 

That’s a steep cost. On a $200,000 loan to a first-time homebuyer, for example, it would cost the lender $10,000 to sell the loan, meaning the lender is losing money on that loan. And for a loan that touches the GSEs’ loan limit of $510,400, a lender could have to pay nearly $36,000 for a GSE to buy the loan.  

On the other hand, the alternative would be for the lender to keep a delinquent loan on their books. This solution at least allows the lender to sell the loan and preserve some liquidity, as the FHFA noted.

“We are focused on keeping the mortgage market working for current and future homeowners during these challenging times,” FHFA Director Mark Calabria said in a statement. “Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending.” - Housingwire

The industry was less than enthusiastic with a resolution proposed by the FHFA.

Mark is a libertarian. His perspective is that the government should not intervene in housing markets, and he’s been very vocal over the years about the role of FHA and the GSEs being too big. I believe he is exercising his economic philosophy that the markets will improve without intervention. I think his recent comments were blasphemous and they aided in additional tightening of credit. The statements also reflect his lack of experience in the business. He’s never been in the industry; he’s always been an economist. I’ve seen much more aggressive positions taken about his job right now. I think Mark is being naive and putting the housing finance system at risk. More importantly, this is going to have huge negative pressure on an economy that’s already struggling. The housing system is 40 basis points of the gross domestic product and about a fifth of GDP is housing. This will be a core component of economic recovery, and you want it to be strong as we go back to work. Mark is doing anything but providing that support. – Housing Wire interview with former MBA President, David Stevens

The Administration appointed Mark Calabria to head up FHFA, which oversees Fannie Mae and Freddie Mac. Fannie and Freddie were created to bring liquidity to the housing market and spur homeownership; and have done so since 1938 with great efficiency. Yet, Mr. Calabria is opposed to the government being in the housing market. The Administration has made it a priority to end conservatorship for the GSEs (i.e. Fannie and Freddie) and eliminate the risk to the taxpayer if the GSEs were to fail. Due to the poorly implemented CARES Act, not only did the Government put the GSEs in a potentially catastrophic position, it also forced what will inevitably be another tax-payer bailout. Yet unlike 2008, this bail-out will be solely the creation of the U.S. Government. The U.S. Government can create a liquidity facility to bridge the capital needed by the mortgage industry to forward payments (including taxes and insurance) when borrowers go into forbearance. This needs to be implemented quickly, as spiking default rates are putting enormous pressure on the mortgage industry which is now being felt by the housing market, as interest rates remain inflated due to risk, and credit underwriting guidelines tighten to levels not see since the Great Recession.

“Congress has correctly decided that a nationwide, broad scale forbearance program is needed, but we need to make sure this is done responsibly to avoid unintended consequences and market uncertainty,” the Republicans said. “The mortgage industry cannot shoulder the entire onus of government actions to protect American homeowners impacted by COVID-19 when it does not have access to needed liquidity to execute on those government actions.”  

“The unforeseeable nature of the present liquidity strain on the mortgage market, similar to many other sectors of our economy, is of a systemic nature, including the inability of the servicing industry to manage billions of dollars in principal and interest advances mandated by regulators and Congress – which could result in significant disruption to servicing touchpoint for consumers and, importantly, less competition in this space as servicers go bankrupt,” the Republicans write. 

“When struggling homeowners and renters are able to return to their jobs and resume making the payments they intended to make, it may become appropriate to talk about larger structural reforms to better handle events like this in the future,” they continue. “However, the current priority must be this liquidity crunch.” 

“Those funds would be put to very beneficial and appropriate use by supporting forbearance for all borrowers,” the representatives write. “As we all learned from the past crisis, the best way to protect the American taxpayer would be to create a facility now – in hope that it never needs to be used – than to wait for a market disruption when it may be too late. The mere creation of such a facility may provide a level of support to the market without its even being utilized.”

The mortgage industry was largely responsible for the Great Recession of 2008. Today, during the COVID-19 crisis, the mortgage industry could be part of the cure, at least financially. If you are going to protect the consumer, you must protect the lenders that make the consumption possible. A liquidity facility would lower interest rates substantially, loosen suffocating guideline restrictions, allowing homeowners to lower their expense, and help jump-start the economy. The mortgage industry does not want a handout, only government protection from those that do. The Administration acted with unprecedented speed to protect homeowners from foreclosure with zero consideration for the industry that makes homeownership a reality. Without liquidity, the mortgage industry faces collapse, along with the U.S. housing market.   MORTGAGE CREDIT CRASH OF 2020 The availability of mortgage credit for borrowers, largely due to COVID-19 and the CARES Act, crashed in March.

The Mortgage Credit Availability Index free fell 16.1% in March. The Conventional Index (non-government loans) fell 24.2%. The Jumbo index dropped 36.9%. Government Index fell a modest 6.6%.

The CARES Act exponentially increased risk for lenders. Result: Stop making loans for anyone likely to default under the strains of COVID-19. COVID-19 HITS HOUSING Existing home sales in March posted the biggest drop in four years, falling 8.5%. Despite sales dipping drastically, the median price still rose 8% year over year. Inventory remains low as homeowners put a pause to buying or listing homes for sale.  Housing starts faired even worse, posting a 22.3% pullback in March; the biggest drop in 36 years. While inventory remains low, demand for housing continues to soften. FORBEARANCE 101  ·      Not paying your mortgage creates harm for the industry and the United States as a whole. ·      Not paying your mortgage will affect your ability to obtain a mortgage in the future. ·      If you do not pay your mortgage, someone else will have to pay it for you. ·      What you do not pay now, you will have to pay later; either tacked onto the end of your existing mortgage or paid in one lump sum once out of forbearance. 

If you can pay your mortgage, pay it. That is the agreement you made when you signed your closing documents. If you must make the decision to feed your family or make your mortgage payment, please, take care of your family first. Those that are not harmed by COVID-19, and still take advantage of forbearance, are hurting themselves, and this Country. Please reach out to your mortgage professional with any questions or concerns. GENEVA FINANCIAL, LLC NOW LICENSED IN 43 STATES  Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, Washington D.C.

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