Find out how mortgage markets are being impacted by COVID-19-related shutdowns and what you should do next.
In mid-March, when the Federal Reserve cut its benchmark interest rate to 0%, many consumers rejoiced. Most prospective or existing homeowners figure that their mortgage rates are directly related to the yield on 10-year Treasurys, so the (not unreasonable) assumption was that mortgage rates would swiftly fall to historic lows, making this a once-in-a-lifetime opportunity to initiate or refinance their mortgage.
The reality, however, has not quite been aligned with expectation. The volatility that has resulted from the COVID-19 chaos has been mirrored in the mortgage market. In fact, rates shot up several hundred basis points following the rate cut, with highly volatile daily movements ever since.
Why did the Fed’s rate cut result in HIGHER interest rates for some mortgages?
Instead of nosediving, as many anticipated, some mortgage rates jumped from 3% to 7%. How is that possible?
1. Supply/demand fell out of balance.
At the same time that homeowners were rushing to refinance, the mortgage industry was shifting to a work-from-home model and navigating the new normal in the COVID-19 era. Such unprecedented demand would have required an industry-wide ramp-up of underwriters and processors at the best of times. Given the circumstances, the only way to slow down demand significantly was to raise rates.
2. Early pay-off penalties affected the bottom line.
Early pay-off penalties apply during the first 6-12 months when mortgage companies sell loans to servicing companies. With so much demand for refinancing, lenders would have been on the hook for heavy early-pay-off penalties. In order to avoid this, many lenders raised rates to discourage refinancing.
3. Mortgage-backed securities demand dried up.
Demand in the mortgage-backed securities (MBS) market, where most mortgages end up, also quickly dried up. Traditional MBS buyers, who are typically operating with high leverage, were facing a liquidity crisis of their own. So, if investors are no longer interested in buying MBS, mortgage companies can’t afford to keep issuing new mortgages.
Subsequently, the Fed intervened again, announcing unlimited purchases of MBS and Treasurys, as well as multi-family mortgages, to restore balance to the markets and avoid the extended credit crunch that occurred after the 2008 meltdown. In the two weeks commencing March 16, the Fed bought $251 billion of mortgages – $84 billion more than they bought over any four-week period during the financial crisis in 2009.
This move has started to result in reduced volatility, more stable rates, and a slow downward trend to February rate levels.
Most mortgage products continue to face credit tightening.
While Fed actions have helped to bring some mortgage products in line, others are still fairly elusive. These include:
- Jumbo loans, which have largely dried up. These are mortgages that exceed the maximum subject to guarantee by Fannie Mae and Freddie Mac: as of 2020, that’s $510,400 in most counties but up to $765,600 in more expensive markets. Lately, these loans are much more difficult to find, and have more rigorous standards than before.
- Non-qualifying mortgage products, which are not backed by government entities, have all but disappeared from the market. No matter how strong the applicant’s credit, many lenders have stopped taking applications.
- Government-backed loans, which have tightened lending requirements – required credit scores are now up by around 60 points. Loan-to-value thresholds are now at 20% in most cases, i.e., double the 10% many programs previously required.
Why is the market so tight? In a word, uncertainty. Because it is hard to predict the effect that COVID-19 will have over the next few months, it is hard for financial institutions to gauge risk. Among the questions they are asking:
- How long will the shutdown continue? Some areas are talking about reopening in May 2020, while other experts predict lockdowns through the end of 2021.
- How many people will lose their jobs altogether? How many others will be unable to make mortgage payments with reduced salaries or unemployment subsidies?
- What will the effect be on home values, especially if the real estate market sees significant slowing or post-shutdown foreclosures ramp up?
The enemy of stability is uncertainty, and this is a uniquely uncertain market. Unlike a natural disaster or economic downturn, this is truly uncharted territory, and the long-term effects of the shutdown have yet to fully manifest themselves.
What should you do now?
With everything changing, what are the new rules for borrowers?
Be patient, hang in there and allow the market time to reopen. Large parts of the country are ramping up to re-open in May and many worst-case predictions are now appearing unlikely. That could potentially mean credit flowing by late spring or early summer.
Remember: it’s not personal, it’s business! While lenders are instituting more stringent guidelines, they are doing so in response to a variety of complex, market-related factors. It is not necessarily a sign of your credit unworthiness, nor of any ill will on their part.
Expect longer timelines for government-backed loans. Underwriting guidelines for this sector are expected to remain in place throughout 2020 and possibly into the second half of 2021. If you are applying for one of these loans, make sure you have everything in order and are prepared for the long haul. Since 75% of the mortgage market is government-backed, it’s anticipated that most credit-worthy borrowers who are looking for a mortgage in 2020 will be able to get one.
Anticipate the effects of social distancing. Processing applications and providing service is more complicated under current conditions as are many steps of the approval process, like appraisals, notarizing documents, and conducting closings. For traditional lenders in particular, that means extended timelines – from +-45 days to as long as 90-120 days.
Consider a digital lender. Because they are already set up with a streamlined online process, many can still process your application from start to finish in less than 30 days. Response time for pre-qualification is often cut from days or weeks to mere minutes.
Now might also be a good time to brush up on your mortgage knowledge, familiarizing yourself with the various loan programs that might be applicable and available to you (more on these programs here). And, when you’re ready to move forward, Simplist’s team of experts will be ready and waiting to help ensure that your mortgage procurement process is delightful from start to finish.