Mar 29, 2020

While the Coronavirus is wreaking havoc with mortgage lenders, help is being provided to homeowners and opportunities abound for home buyers and homeowners looking for lower interest rates.

Mortgage Payment Forbearance
We've received dozens of calls from borrowers who are concerned about making their mortgage payments.  If you anticipate being unable to make your payment in the next month(s), please reach out to your servicer.  You can find servicing contact information on your monthly statement or on the web site you use to make your payments. 

For New American Funding mortgages, call 800-893-5304 or email customercare@nafinc.com.  You can also find information online here:  https://www.newamericanfunding.com/manage-my-loan/#covid19relief

From what I hear from my fellow home loan originators and customers who report back, most customers are receiving a 60-90 day break from making their payments.  No late fees, no negative reports to the credit bureaus.  At the end of the forbearance period, borrowers will need to establish a repayment plan with their lender.

Please be patient.  Our servicing team is responding to thousands of requests for assistance and are working 16+ hour days.  Nobody is going to be reported late and nobody will be reported to the credit bureau.  If you can't get through today or you're getting frustrated, take a break.  Call tomorrow.  Or the next day.  Or next week.  Your payment isn't due until April 1 and it isn't late until April 15.

Mortgage Interest Rates
What's going on with mortgage interest rates?  They've settled down quite a bit and are much lower than they were last week.

Funny graph of mortgage interest rate forecast (a child's scribble)

The word on the street is that government interest rates (for FHA, VA, and USDA home loans) are taking a beating (although we haven't seen any evidence of increased government pricing at New American Funding).  Many lenders are reportedly tightening their guidelines for FHA loans by increasing minimum credit score requirements or increasing pricing.  Why have FHA home loans become the red-headed stepchild of the mortgage industry?

After you close on a home loan, you make your monthly mortgage payments to a servicer.  The servicer may or may not be the same company who originated the loan.  Your servicer processes your payments, maintains your escrow account and pays your property taxes and homeowner's insurance when they become due.  But the servicer doesn't actually own your loan.  They just oversee it.

The loan itself is sold to an aggregator or directly to Fannie Mae or Freddie Mac (for conventional loans) or to Ginnie Mae (for government loans).  In either case, your loan is packaged up with other similar loans and sold to an investment banker.  That banker buys a bundle of mortgage loans with similar qualities.  Maybe they're all conventional loans with interest rates of 4%, credit scores of at least 720, and down payments of 20%.

The banker then converts those loans to mortgage backed securities (MBS) that are sold to the public.  Those MBS then appear in different investments like mutual funds and pension plans.

The servicer pays upfront for the right to service your loan (typically 1% of the loan amount).  In exchange, they receive a small monthly payment for managing your account.  Because they pay to obtain the servicing rights and receive income only when a borrower makes payments, the "break even" period is usually about three years.  The longer the servicer manages the loan, the more money they make.

Now, when interest rates decrease dramatically, it causes people to refinance loans they may have only had for a short period of time - certainly before that three year "break even" point.  This servicing runoff results in losses for the servicer and adversely impacts the value of their servicing portfolio.

That being said, lenders should experience an increase in new loan activity because of all those borrowers who want to refinance during a period of declining interest rates.  This gives the lender additional income to help overcome the losses in their servicing portfolio.

Enter the Coronavirus, which has caused virtually the entire US economy to shut down.  The number of unemployment claims reported last week was 3.28 million.  That's the most initial unemployment claims filed in one week in history.  The previous record was 695,000 in 1982.  Rampant unemployment adds an entirely new risk to the servicer.

Servicers accept your mortgage paymetn and pass (most of) it along to the investor.  Conventional loans (usually) have what's called an actual/actual remittance type.  That means the servicer forwards the actual principal and interest payments they collect from the borrower to the bond holder.  If a borrowers stops making payments, that servicer is only "on the hook" for one monthly payment (because mortgage interest is paid in arrears).

That's not how it works for government loans.  Servicers of government loans must pay the scheduled payment to the investor, regardless of whether they collect that payment from the borrower.  The servicer must continue making those payments to the bond holder until and unless the lender forecloses.

Now, when you talk about 20% unemployment numbers and government approved forbearances, this becomes a very big deal.

New American Funding has a servicing portfolio of $31 billion.  And that's not even a huge portfolio by industry standards.  Wells Fargo, the largest servicer of residential mortgage loans in the US, has a servicing portfolio of $1.17 trillion.

If anywhere near 20% of borrowers don't make their payment in any given month, that's a huge hit.  And if 20% of government borrowers stop making payments for any length of time, that's just not sustainable.  And that's why some lenders are really pulling back on government loans.

And that's not the only problem.  Lenders are also afraid of first payment defaults.  Most consumers who closed on their new mortgage loan in February would have their first payment due April 1st.  If a borrower misses his first payment, Fannie Mae, Freddie Mac, and Ginnie Mae won't buy that loan.  And when lenders have "buy backs," that's also a really big deal.

If you're a real estate agent, think about the firm for whom you work.  What if they had to buy back houses if something went wrong a few months after the sale?  How many houses could they buy before they couldn't afford to be in the real estate business anymore?

I'm sure larger lenders factor a small number of first payment defaults into their budgets.  But smaller lenders may not survive.  Someone needs to restart the Implodometer.

What if you want to purchase a home or refinance?
Now is a great time to purchase a home.  We've seen a number of new listings in the last few weeks, and I expect that number to continue to grow.  You may find less competition and fewer cash buyers.  And interest rates have never been better.  Your REALTOR® will follow strict guidelines to comply with the governor's "Stay Home, Stay Healthy" order and keep you safe.

Mortgage lenders are considered an essential business, so it's (almost) business-as-usual in our office.  The only difference is that we're conducting business almost 100% from home.  But it was an easy change to make, since most of our business is highly dependent on technology anyway.  We don't even keep paper files in my office.

Instead of in-person meetings, we're conducting WebEx meetings and exchanging paperwork electronically.  And for customers who don't have a printer/scanner, I'm doing lots of porch pick-ups!

If you want to refinance, we do ask that you exercise patience.  There are something like $11 trillion of outstanding mortgage loans in the US.  One estimate I read said that at least half of them were now eligible for a refinance, so $5.5 trillion.  In a busy year, the entire mortgage industry originates just over $2 trillion in home loans.  We cannot physically process more than two years of business in a few months.

I recommend "getting in line" with your local lender.  Complete your application, provide the necessary paperwork, and acknowledge your disclosures.  When interest rates are most favorable, your loan officer may only have a window of a few hours to lock dozens of applications.  We will not have time to call you to discuss your options.  If you're not already in line, you'll have to wait for the next window.

While the impact of the coronavirus on the mortgage industry may pale in comparison to the 2008 financial crisis, there are great opportunities available for consumers!

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