This is a guest post written by Mike Krumholz of Fairway Mortgage:
I wanted to give you an update on where things are in the Mortgage World to date. Our market is currently very fluid, so we are getting updates all the time. These changes are not unique just to Fairway – this of course is industry wide.
Summary of how servicers impact the mortgage business and what is causing them to pause
To be very transparent the mortgage business is in a tough place currently. It’s not because of lack of business… it truly is because of a bottleneck that is forming at the servicer level. The problem arose from the fastest ever economic adjustment the world has ever seen. Here is a high level explanation of how the process works:
- We help you originate the loan and we fund the loan using warehouse lines of credit, we then have servicers agree to service (ie help collect your payments) the loans and sell them to Fannie Mae/Freddie Mac/Ginnie Mae. There is a cost that the servicer pays the mortgage company to have that right as they make a little money monthly to service the loan.
- Many servicers are being very selective on the loans they want to service right now… which is freezing up liquidity for mortgage companies.
- Barry Habib did an excellent write up here. He is probably the expert leader in my opinion on interest rates and what to expect. He went in to more detail if you want to read it.
- Why are they doing this? A couple reasons:
- Many are projecting that mortgage rates will get very low once everything stabilizes from this. These servicers are having to pay a premium to service these loans which will take around 3 years for them to break even. They know if rates drop they will have a lot of these loans refinance and they won’t make enough from the servicing premium over a short term. This is something they always deal with but when rates drop drastically it can be very expensive for them.
- Margin Calls – See Barry’s article above – to summarize it’s using up their reserves and further tightening up their cash supply.
- The bigger one that is really causing them to pause – we had 3.2million people who filed for unemployment last week. This crushes any previous record. The worry is that they probably couldn’t really account for how many really filed and that number is just going to get higher until the Coronavirus outbreak gets figured out.
- The servicer has a commitment to make a mortgage payment to the end investor regardless of whether the borrower makes their mortgage payment or not. For a conventional loan that is only one payment. For a government loan (VA, FHA, or USDA) that can be indefinitely.
- The government is stepping in and offering forbearance program (ie you don’t have to pay your mortgage payment for up to 180 days), foreclosures won’t be happening, no damage to your credit, etc. This is going to have a HUGE impact on servicers as they will still need to cover that payment regardless of if it hurts the borrowers credit or not.
- People who may be out of work and might benefit from forbearance – please talk with your current servicer. You will need to get approval by them.
- So these servicers are suddenly looking at their cash and rather than wanting new business they just want to make sure they can survive. They don’t want new mortgages where potentially 20% might be out of work very soon and to top it off they are going to pay a premium to have that business.
- This is a HUGE deal because mortgage companies need these servicers to take these loans off warehouse lines of credit so we can go get new loans.
- In 2007 this put big mortgage lenders like First Magnus out of business and it happened really quickly. They couldn’t get loans off their warehouse lines.
- From what I am hearing the current market could put different mortgage companies and warehouse lenders out of business as well if they aren’t careful. We really hope that is not the case and hope this can be resolved quickly.
Summary of changes that are happening currently because of that pause
- Servicers still want to make money so they are still servicing loans but they are being much more selective. Their current ice cream flavor of choice is vanilla.
- Non QM loans have completely gone away. These are kind of the present day subprime loans. We don’t see them coming back anytime soon.
- Government (VA, FHA, USDA) credit guidelines just got much stricter. We had been able to get approval on government loans with credit scores as low as 580 and with debt to income ratios 55%+. In the next few weeks/days the credit and debt ratio guidelines will change. Why is that?
- Remember servicers have to make the payment on government loans indefinitely if a payment is missed (as opposed to just one payment with Conventional).
- On average a government loan borrower has less than 3 months reserves when we close them.
- They have put no money in to the deal and their debt to income ratio is much higher. They therefore have a much higher risk of default if they are to lose their job.
- Jumbo Loans are also in a tight spot. Several of the largest Jumbo investors have paused on taking on new loans. Those that are have tightened up their lending criteria significantly. It’s going to take some time for this sector of the business to recover as well – some are projecting until 4th quarter. Currently the loan limit for Palm Beach, Broward and Miami-Dade Counties for a Conventional loan is $510,400. For loans that will exceed that we will most likely look at doing first and seconds with local credit unions as an option.
- Bond Loans(Down Payment Assistance Loans) - They have their own unique risk. Let’s suppose that you closed today (3.29.2020) on your mortgage. Your first mortgage payment would be on May 1. How many people might not be able to make that first payment because they are out of work? One thing we haven’t discussed yet – if someone misses their first payment that mortgage is unsaleable and then it sits on a warehouse line.
- The pause on Jumbo and Bond loans is temporary.
- Just a reminder things are changing rapidly. The government sees the issues with servicers and is actively working up solutions. If a solution is provided quickly I’m sure we would adjust quickly as well.
Outlook:
This is very different than 2008. This is not a financial crisis or a housing crisis but a virus/health crisis which has led us in to an unemployment crisis. Housing was a big part of what brought us into the 2008 recession and it very possibly could be the thing that helps us get out of this one. Real Estate is still very strong. We still don’t have near the supply to match the demand. Heck a buyer might want to take advantage of the quarantine time and compete with three offers rather than 12.
When things do stabilize we will continue to have a strong real estate market with historically low rates for some time.
We are still closing loans. We are looking at it like this is our time to shine as well. We will communicate and keep you posted on any changes that are happening and ensuring that we are doing all we can to keep clients qualified and able to buy.
We will get through this and come out of it stronger because of it.
For further information please reach out to Mike Krumholz at 561.289.7718 or email to: michael@fairwaymc.com
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