Rate Watch #1235 – Effects of What’s Happening on Mortgages.
March 30, 2020
by Dick Lepre
What Has the Fed Done?
Having unlimited chips the Federal Reserve can never be “all in” but last week they certainly went darn close in providing liquidity.
Lowered the overnight Rare target to the range 0.00%-0.25%. This is symbolic and attention getting and the effect was to eliminate the open market and make the Fed the lender of only resort rather than the lender of last resort.
The Fed reopened many of the liquidity providing operations it had created in 2008 including the Commercial Paper Funding Facility (CPFF), Primary Dealer Credit Facility (PDCF), and Term Asset-Backed Securities Lending Facility (TALF). The Fed also started new facilities essentially providing a maximum amount of liquidity to banks.
The idea as that when the COVID angst abates banks will have a ton of cash to lend.
The Fed also started purchasing both FHLMC/FNMA paper and agency CMBS (Commercial Mortgage Backed Securities) which are essentially FNMA loans on apartment buildings. A paper on this is here https://sites.krieger.jhu.edu/iae/files/2020/03/Policy-Responses-to-the-COVID-19-Pandemic.pdf?fbclid=IwAR2EldanEWoGFs4vdm4xVI8zk56xZd6viwF2m5rjPrSao7UJJZSvfYWPy14
So with all this Liquidity Rates must be very low. Right?
Many thing have happened which have either ended certain loan programs or caused mortgage rates to increase despite the Fed’s policies. Some are things I have discussed before: fear of early payoff which translates into losses either for investors of the companies which sold them the loan paid off early, capacity problems both with staff and fiscal capacity.
Let’s add some more. At LendUS/RPM when we rate lock your loan we are getting a guaranteed rate from the investor we intend to sell the loan to. Some other lenders do not do that, instead they use a model to buy or sell a derivative position which they believe will protect them from rate risk. Some of these folks have lost a lot of money because their hedging model failed.
In the past couple of weeks we saw the end of non-QM mortgage securitization and are starting to see difficulties even with high quality jumbo mortgage securitization. The issue is the lack of price discovery which is a way of saying that sellers and buyers cannot agree on a price for jumbo mortgages. This is a consequence of uncertainty.
It Gets Worse
What just got popular was talk of forbearance. Mortgage forbearance usually occurs after disasters such as fires. If your house burns down you contact the servicer of your mortgage (the party you write the check to) and request a forbearance agreement. This essentially allows you to stop making mortgage payment to 3 months, 6 months, a year or whatever is appropriate. The interest still accrues so that when your house in livable and the forbearance stops you will have a new payment based on the new balance and the remaining term.
What is happening at present is that politicians and government entities are suggesting forbearance for those impacted by COVID. This seems wonderful and humane except for one gigantic problem. The entity which is servicing your loan has guaranteed that if you do not make your mortgage payments whether in forbearance or otherwise they still have to make payments to FHLMC, FNMA, or GNMA.
Post the Great Recession government policy (and I admit this is an oversimplification) was to move risk outside the banking system. One of the relocated risks was precisely this business of moving mortgage servicing outside the banking system.The unintended consequence here is that these mortgage servicers do not have the capital to make the payments to FHLMC/FNMA on the loans in forbearance.
My view (and I need to state that many of the people I have discussed this with disagree) is that if forbearance happens to a significant extent someone needs to make good the money that these mortgage servicers cannot send along to the GSEs. If this does not happen and FNMA and FHLMC cannot make the payments to the ultimate holders of the beneficial interest of the cash flow the credibility of FHLMC and FNMA will be destroyed and conforming mortgage rates will be higher because the perception that these are guaranteed by the U.S. government will vanish.
Treasury presumably could do this as part of the $500 billion in the new bill set aside for the corporate relief program. Doing so has a political price especially since this is an election year - a time when clear thinking is set aside. Since Treasury is a 79.9% owner of the GSEs this looks more like taking money from one pocket and putting it into another. If these mortgage servicers cannot repay the loans Treasury can deal with that at some future and less angst-filled time.
How to Get Forbearance.
If you want forbearance because job loss has eliminated your ability to make mortgage payments you must contact your mortgage servicer and request forbearance. The servicer’s web site may have instructions as to how to request forbearance. Otherwise it can be started over the phone but completed in writing. You need to request this and only the servicer can grant it. Continue to make you payments on time until the forbearance is approved and in effect. This way your credit will not be damaged. After the Great Recession there were many former homeowners who were not able to get mortgages for 5-7 years because they had foreclosures or had executed deeds in lieu of foreclosures.
How Long will this Last?
I don’t really know. What I do know is that no one knows. If the Fed continues to purchase GSE and GNMA securities that will help keep rates low. This uncertainty will likely result in tougher lending standards including but not limited to: higher scores necessary to get FHA/VA loans, lower maximum LTVs on jumbo loans, tougher standards on HELOCs.
LendUS/RPM now offers Advance Approvals. If you are thinking of making an offer on a home this is significant. Our Advance Approval gathers your loan application, credit report, income and asset documentation and is given an actual underwriter approval without a specific property. Once this is done you will get a letter saying that you have an underwriter approval for a loan up to a certain amount with a specified down payment for a “to be determined” property. This enables you to make an offer to close in 25 days. The fact that you have a RPM Advance Approval and can close in 25 days significantly improve the chance of your offer being accepted.This is especially true in the places where inventory is scarce.
If you want an Advance Approval email or phone me or apply online on your computer or Smartphone at:
Technical Analysis from Jim Grauer
The 10-year Note should trade in the 0.60%-0.90% yield range this coming week.
Detailed stochastic analysis is here http://www.loanmine.com/CustomPage378.x
Senior Loan Advisor
RPM | MORTGAGE
3240 Stone Valley Rd West
Alamo, CA 94507
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