The coronavirus pandemic is radically reshaping the economy with business closures and job losses. But what about the housing market and mortgages? Is now the time to finance or refinance?
To get some answers Bankrate spoke with David H. Stevens, one of the nation’s leading mortgage authorities. Stevens is the former CEO of the Mortgage Bankers Association (MBA) and was the Federal Housing Commissioner under President Obama. He is the CEO of Mountain Lake Consulting, Inc., a financial services consulting firm focused on the real estate finance sector.
The interview which follows has been edited for length and clarity.
Is now a good time to get a mortgage?
Stevens: Right now, short term, may not be the best time to get a mortgage. The issues stemming from the virus have impacted the economy in a variety of ways, but one of the harder-hit sectors is the mortgage market.
Mortgage-backed securities prices have fallen in the past two weeks and rates are higher than they might be in the weeks to come should things begin to settle down. That being said, if you are buying a home this could be an opportune time before the housing market comes back, and while mortgage rates are a little higher than they were, they are still near their record lows historically.
Has the mortgage application process been disrupted? Are there special steps borrowers should take to get financing?
Stevens: Fortunately, the industry is far more automated than in previous times. Almost all of the lending process can be done online. From the application which is almost certainly online for any lender, to being able to scan and email key support documents needed to approve the mortgage, the vast majority of the work can be done without the need for face-to-face contact.
Freddie Mac and Fannie Mae also have property inspection waivers that they offer on a significant percentage of refinance loans and are committed to expanding the use of alternatives to physical on-site appraisal requirements. Depending on the lender and the state where the property is located, the use of e-signatures and other remote signatures may allow you to skip the closing altogether and simply do the process virtually.
Can we expect home prices to stall or decline after eight years of steady increases?
Stevens: The National Association of Realtors reported that February’s existing home price increase marked the 96th straight month of year-over-year gains.
While the coronavirus is a significant event and one that is adversely impacting both the health of the nation and also the economy, the long-term reality of demographics and housing supply won’t change.
As we look forward to getting past the curve and a return to work and school we will return to a nation that is creating 12 to 14 million new households over the next decade, according to the Harvard Joint Center for Housing Studies. This suggests a significant shortage in available inventory. So, while the economic recovery resulting from the virus may slow things down for the short term, the long-term prospect for home price gains remains optimistic.
Where do you see mortgage rates headed in the coming month?
Stevens: In the short run the impacts of the virus are affecting a variety of components that make a mortgage rate. Mortgage-backed securities are out of balance, causing rates to rise, servicing valuations are declining, and investors that participate in this arena are trying to determine what this might mean for default rates and more.
That being said, the Federal Reserve announced a significant increase in their participation in the market, which will help remove some of this imbalance. I expect rates to once again start coming down as we move beyond this period. The fundamentals for lower rates are good, the technical conditions are shorter term and making rates rise, but this too should pass.
Looking out over the next month, it comes down to the timing and impact of the legislative efforts and actions by the federal agencies and that is still not entirely clear.
With the steep unemployment increases we’re seeing, can residential properties hold their value?
Stevens: This all depends on the duration of this period and the impact from the legislative and regulatory efforts being considered right now.
Keep in mind that while most Americans are being told to work from home, there are millions working remotely. We are seeing growth in select service industries with companies like Amazon, Insta-Cart, UPS, and more trying to hire thousands of workers.
Workers employed in travel, events, small retail, and restaurants are among those that may face the biggest impact. A significant portion of these employees may not own homes.
So, while there will be a default spike from this, how it will penetrate home values is still a question. More importantly, forbearance plans and foreclosure enforcement stoppages have been announced which will hopefully help cushion the impact, especially as these plans are targeting support for renters as well as homeowners. This all comes down to how long this lasts and whether we can flatten the curve of the virus so that America can return to work sooner.
With a foreclosure moratorium for Freddie Mac, Fannie Mae and FHA mortgages what happens to servicers if non-payments grow significantly?
Stevens: Servicers are the companies that collect monthly payments for mortgage investors. They are also the companies that deal with late payments, non-payments and foreclosures on behalf of the investors.
This is a huge issue. Servicers reserve funds for “expected default” and even hold a reserve above that. But when an entire nation is told to go home and these forbearance programs and foreclosure moratoriums are put in place, the cumulative burden falls on servicers. If a borrower does not pay his or her loan, yet the servicer must still pay the holder of the mortgage security, that cash has to come from these reserves.
If the payments stop coming from a huge percentage of your customers, like one-fourth, one-fifth, or more of borrowers, the entire system could collapse. This is why there has been so much effort to create a liquidity platform at the Federal Reserve, at Ginnie Mae (the Government National Mortgage Association or GNMA), and with the GSEs (Government-sponsored Enterprises such as Fannie Mae and Freddie Mac) to fill in the gap and insure that servicer can function.
A proposal has been sent to Fed Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin to address this need and legislation is also being introduced in Congress. It is supported by the key industry groups as well as some key consumer advocates. It is an absolutely critical need to create this liquidity platform.