COVID-19 UPDATE: WHAT IS HAPPENING TO THE MORTGAGE MARKET?
These are unprecedented times and many of us are dealing with non-daily routines and increased concerns. We had a strong economy going into this pandemic and we will be able to pull through once it is over. We want to let you know what is happening in the market. We have included a lot of information, but it is still a very simplified. If you have any questions, please contact your loan officer.
We have had a combination of events hit our market in the last month going from all-time low rates to extreme market volatility.
Actions made by the Federal Reserve might have ended up causing more harm than good. This means all lenders are taking fewer risks on loans and it will be harder to get a loan approved. We will do everything possible to help you, but keep in mind we are following industry-wide guidelines.
THE FEDERAL RESERVE
The Federal Reserve cut the fed funds rate to zero and launched a quantitative easing program to support financial markets. Headline news steered many consumers into believing that the Federal Reserve’s rate cut is correlated with current mortgage rates. This is not true. The cut to the fed funds rate is tied to the rate at which banks and other depository institutions are able to lend and/or borrow money from each other.
By lowering this rate, the Fed’s intention was to maintain lending between banks which would ultimately flow through to the consumer. These transactions are vital for a thriving economy. While this is not directly reflected in mortgage rates, the bigger picture helps understand why the Fed decided to cut its target rate and provide some aid to the economy as the world navigates the COVID-19 pandemic.
THE SECONDARY MORTGAGE MARKET
Many of the mortgage companies that you get your loan through don’t own most of the loans they close. Once a loan is closed it is either sold to another loan servicer or pooled with a group of similar mortgage loans and sold to mutual funds, insurance plans and other investors as a mortgage-backed security. The servicer of the loan manages the individual loans by making sure the monthly payments, taxes and so forth are paid and collected. The monthly payments are then passed on to the owner of the mortgage-backed security. The servicer receives some fee income on the loans in their servicing portfolios, but this is only a small portion of the loan amount.
With interest rates recently at all-time lows, the market saw a surge in people refinancing their loans. When a loan is refinanced it pays off the previous balance on the serviced loan and creates a new loan that may or may not be sold to the same servicer. This shortens the lifespan of loans on servicing portfolios and reduces the overall value for the servicer on its assets (loans). If a loan servicer’s assets decrease too much, they are not able to obtain financing and/or lines of credit to buy new loans. This creates cash flow problems for these servicers and effects their ability to operate.
When a mortgage company locks a borrower’s rate it establishes a time period in which it promises to have funds available and deliver that rate to the borrower, regardless of market movement. If the rate increases between the time of the lock and the time the loan closes, the lender continues to be obligated to deliver that rate to the borrower but will owe the difference in price for the specified rate. To protect themselves, lenders use financial derivatives to hedge loans that are locked. If rates increase between the time of lock and closing, then the hedge position helps offset the cost to deliver that note rate into the secondary market. In a typical market environment, this is a low-risk way of doing business and minimizing potential exposure to a lender’s pipeline. However, when the FED began to purchase mortgage-backed securities in excess, it created instability and extreme volatility in rates which impacted lenders’ hedge positions.
The broker-dealers who accept the hedge positions from its clients (lenders) monitor the exposure and determine a threshold in which they issue Margin Calls, which are requirements for the lenders to front funds to cover potential losses. Some companies, depending on the size of loan pipelines and hedge positions, have had large margin calls potentially in the hundreds of millions of dollars.
COVID-19 has also led to record unemployment numbers. Many people are either being laid off or getting their hours drastically cut. This adds risk, because even though the servicer does not own the mortgage, they are still responsible for the payment to the investor.
The loan servicer usually has plenty of capital to make payments, but because of the loss of assets due to refinancing, margin calls and mortgage forbearance, servicers are short on cash.
This means mortgage companies are upping requirements for each loan and making sure borrowers are able to pay.
WHAT THIS MEANS FOR OUR BORROWERS (as of April 2, 2020)
We are still working diligently, but we are following industry-wide guidelines to avoid unnecessary risk. We will be asking a few more questions and changing some of our requirements. Please give your loan officer a call with any questions.
- Higher credit score requirements for FHA, VA and USDA loans
- More restrictive debt to income ratios.
- Rates are fluctuating rapidly.
- Jumbo and Non-Conforming loans will not be as easily available.
Employment verification is confirmed closer to the closing date.
- Exterior only or desktop appraisals are acceptable on most transactions.
For everyone’s safety, a lender cannot be at a Closing in person,
but we are there in spirit and will call to help celebrate!
Your safety is of utmost importance! We are following the guidelines of the Center for Disease Control (CDC). Fortunately, the loan process can mostly happen on our GoGraystone App, GraystoneMortgage.com, email or over the phone.
As we mentioned earlier, Graystone Mortgage has a business continuity plan for these types of circumstances which we executed on 3/13/2020. This plan enables our team members to work remotely from home with the same capabilities as if they were in the office. All remote users use a two-factor authentication along with a NIST cybersecurity framework to ensure the security of non-public information. You can be assured we are working diligently making sure your loans are processed quickly, accurately and safely.
When it comes time for your closing, we are working with Title companies to ensure a clean and safe environment.