While the housing industry was strong and stable going into the COVID-19 crisis, which I still believe today will prevent a major housing crisis similar to our last one, but we do have one aspect we need to pay very close attention to. The Mortgage Industry. Specifically the Non-bank Servicers
Before COVID-19 Loan Servicers were already feeling the pinch due the reducing interest rates dropping and homeowners rushing to re-fi to reduce their rates.
Let me explain. When you get a loan from a bank or mortgage broker. The loan is then serviced by a loan servicer company. The loan servicer pays “x” amount to the mortgage note holder to service your loan on average about 1% of the loan amount. The Loan Servicer’s break even point to service your loan is around 3.4 years. Which means they don’t start making any money until around year 4 on average. Which is no problem generally with a 30 year loan.
Let that sink in a moment. They just didn’t pay money to the note holder to service your loan, but millions of them. So now, the rates go crazy and hundred of thousands move to re-fi out their higher interest rate loan…now that servicer loses out…especially if you re-financed within that 3-4 year period. OK, not a to big of deal yet…but now COVID-19 kicks in and oh yeah the FED says, OK, skip your payments and not get dinged on your credit (not really true, but not part of this post).
Why is this important? When homeowners stop making payments on their home mortgage, the loan servicer that handles the loan and your payments is still on the hook to the mortgage note holder. They HAVE to keep sending your payment, even though you didn’t pay, to the insurers and investors in the mortgage-backed securities. So here is the issue: people not making payments, money still going out …how long before some of them go bankrupt. Are you seeing the huge potential problem here yet? You got it, if enough go belly up, there is your Mortgage Industry crisis.
If the Federal Reserve steps in and provides some kind of relief to help the Mortgage Industry, it would be a big step in helping prevent the mortgage finance system from collapsing. If they are stepping in to help the borrower, they can’t be one-sided, they have to help both sides in my opinion. come Mark Calabria, it’s time to provide relief, it’s in your power to do so.
Let’s add another issue, yes there more. With millions not paying or getting forbearance on their mortgage, Wall Street is predicting a rise in foreclosures. As a result, secondary investors have no appetite for this type of investment right now, which is contributing to what we are seeing now, read on.
As of this writing the following changes have been announced to Mortgage Overlays (the lender’s box a borrower must fit inside in order to be approved for a loan):
- Increased FICO Score Requirements
- Debt to Income Ratio (need to have less debt and more income)
- Loan to Equity guidelines increased (Loan amount to appraised amount has increased)
- Increased asset requirements (to have more funds in the bank)
- Non-QM Loans disappeared overnight (Stated Income, Short term requirements after default event like foreclosure, short sale)
- Jumbo Loan gone or require larger amounts of skin in the game
- Down payment Assistance and Bond Grants Halted
“Lenders tend to be more proactive instead of reactive since the Great Recession” They are taking preventive measures now. We are starting to see tighter guidelines and reducing or removing types of products. So in other words, the lender “box” is getting smaller and tighter by the day
We do have some lenders that can still provide some of these above mentioned programs and still get loans with lower FICO scores, but it’s a day by day basis right now.