This week's Housing and Mortgage Market Weekly Report

US Housing News & Mortgage Market Weekly

Previous Housing and Mortgage Market Weekly Reports

All-Time Low Mortgage Rates!
US Housing News & Mortgage Market Weekly
Weekly Newsletter May 15, 2020 4:12 PM ET
Before coronavirus, the average 30yr fixed mortgage rate was almost always 1.6% to 2.0% higher than 10yr Treasury yields. When bond volatility was extreme (especially when Treasury yields were dropping quickly), that gap could be wider, but it was never even close to current levels. Why might this be? When an investor buys a US Treasury Note, there's effectively no risk that the government will fail to send a payment on time. Believe it or not, this is largely the case with most of the mortgage market as well--or at least it was the case before coronavirus. Mortgage investors have a safety net that guarantees timely payment even if homeowners aren't making payments. The problem with coronavirus is that the amount of non-paying homeowners is higher than ever thought possible. It led mortgage investors to question the strength of existing safety nets. Even though investors have no doubt they'll get paid eventually, there has been plenty of uncertainty surrounding the timeliness of the payments as well as other costs that might arise in this unprecedented environment. When a mortgage investor is guarding against uncertainty, it makes rates higher than they otherwise would be. When they're guarding against an unprecedented amount of uncertainty, it makes rates MUCH higher than they otherwise would be. That can be seen in the following chart of average 30yr fixed rates versus the 10yr Treasury yield. The orange line is simply the difference between the two. The higher it is, the higher mortgage rates are relative to Treasury yields. As the pace of new forbearances subsides, they've been closing the gap surprisingly well.

The Truth About Skipping Mortgage Payments (And The Consequences)
US Housing News & Mortgage Market Weekly
Weekly Newsletter May 8, 2020 4:12 PM ET 
Every professional in the housing/mortgage market understands the crushing economic changes for many households as a result of coronavirus. It makes all the sense in the world for those households to pursue the forbearance option (skipping mortgage payments for 180-360 days) if needed. But it may make considerably less sense for those who aren't truly in need. Either way, the decision should not be taken lightly and its consequences are already being felt. The CARES Act requires that mortgage servicers grant forbearance without verifying need. In other words, if you say you have a financial need, your mortgage company can't ask you to document it. This has resulted in a much bigger surge in mortgage non-payment than the industry expected. When people don't pay their mortgage, the fallout is a bit different than most other things in life. For instance, if I loan you $100 and you don't pay me back, I'm out $100! If you gave me some collateral, I could sell that and try to recoup some of that $100 of course, but I'd still come up short--especially when factoring in time and energy. The investors fronting money for mortgages don't have to worry about getting repaid. There are guarantees in place for that from housing agencies (Fannie Mae and Freddie Mac, primarily). But those guarantees only mean the investor will get the principal and interest they otherwise would have received for the time the mortgage existed. They DO NOT protect the investor from other expenses that can arise when a homeowner isn't making payments. That's typically not too big of a concern because the risk of non-payment is low and stable enough that it can be easily managed. With the risk now higher than ever and without knowing how long the situation will last, uncertainty reigns supreme among mortgage investors. Uncertainty has a cost. For instance, the housing agencies that guarantee a majority of mortgages are now charging 7% of the loan balance to lenders when new loans enter forbearance status too soon after closing. The time window can be as long as 6-8 weeks in some cases. In other words, the lender loses $21,000 on a $300,000 loan. Such costs quickly add up to insolvency for some lenders. The investors who buy mortgages are accounting for these new risks by charging higher rates and fees, or by simply ceasing to offer certain loan programs altogether. The greater the number of forbearance risk factors, the higher you can expect the rate to be, EVEN IF you personally don't agree that the risk factor applies in your case. Moreover, the industry's definition of "risk factors" might surprise you. Case in point, housing agencies won't buy/guarantee cash-out loans at all if there's been early forbearance, even with the 7% penalty). Rather than run the risk of getting stuck with a mortgage that can't be sold to or guaranteed by the housing agencies, many investors simply aren't doing cash-out mortgages right now. Most of those who remain in the game are charging extra fees and/or higher rates. That means that a borrower with an 800 credit score who wants a cash out loan for half of their home's value (a stellar credit risk historically) would still pay a much higher rate. To a large extent, this would be happening regardless of the people opting for forbearances who don't really need them. But those people are certainly making things worse for everyone else. They're also making it worse for themselves. If we look beyond the impact on rates and program availability, there are other reasons a homeowner should think twice before requesting a forbearance they don't need. As the guidelines currently stand, there is no guarantee that they'd be able to refinance or get a new mortgage with forbearance on their credit report--especially if the forbearance is ongoing. This is a head-scratcher for those who've followed the forbearance and CARES Act news reasonably closely, because the law states that there is to be no adverse credit reporting as a result of forbearance. While it is true that forborne payments will not be reported as late, the forbearance itself is still reported, and that's obviously a red flag for the mortgage industry as long as the CARES Act's guidelines remain intact. In terms of credit scores, it is true that forbearance will not DIRECTLY impact someone's FICO, but there's no way to prevent it from having an indirect impact in some cases. For instance, certain creditors are lowering available revolving credit limits in the event forbearance shows up on a credit report. This increases the ratio of debt to available credit, which is a key ingredient in determining FICO score. In other words, even though the forbearance itself is not affecting FICO scores, it can lead other lenders to make changes that cause scores to drop, and it can absolutely hurt your ability to buy/refi in the future. Could that be clarified to your advantage in the future? Certainly, but it's important to know that's not the way it is right now.

Mortgage Rates Are Super Low, But Not For Everyone
US Housing News & Mortgage Market Weekly
Weekly Newsletter May 01, 2020 4:12 PM ET 
Investors buy and sell groups of mortgages that are pooled together in mortgage-backed bonds. The price an investor is willing to pay for a mortgage bond is the primary factor in determining mortgage rates. As demand for these bonds increases, rates fall (all other things being equal). As is the case for other types of bonds, such as US Treasuries, investor demand tends to increase when the economic outlook is bad because bonds offer safety. Investors give up big potential gains in exchange for low, stable rates of return. Given the unique economic circumstances surrounding coronavirus, investors didn't have to wait for official data to tell them the economy was in trouble. As such, they were able to get in position early and quickly. This means bond prices have been relatively flat at extremely high levels for weeks and weeks.