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Mortgages are not quite as simple today as they were a few months ago. Global uncertainty surrounding the pandemic coupled with new government mandates have thrown the mortgage industry into disarray. Lenders, brokers and consumers are finding it very difficult to make sense of this new normal and the industry is suffering.
In response to widespread job loss and economic hardship, a number of states have granted borrowers a 90-day reprieve on mortgage payments. The 2020 federal stimulus package, the CARES Act, also allows some homeowners to ask for a 12-month reprieve. As a result, the servicers of these mortgages are headed into a cash crunch because they are not receiving the monies that they need to make their payments to their bondholders. As the servicers get into trouble, they will not have the ability to make new mortgages. This chain of events could usher in a new mortgage crisis: Lenders would have to raise borrowing standards, such as JP Morgan Chase has instituted, and many people would find they no longer qualify for home loans. We may find ourselves in a period of stagnation.
In addition, banks that continue to make mortgages and then sell them post-closing get into trouble if a borrower doesn’t make their first mortgage payment. It is considered a default on the loan, and that loan becomes un-saleable. The lender is forced to hold onto the loan and may not have the capital to make more mortgages.
Unfortunately, the latest federal stimulus package doesn’t include a bailout for servicers. If no bailout is provided, then the mortgage market could come screeching to a halt. We simply can’t afford to let that happen.
The slippery slope began before the CARES Act was passed on March 27. On March 15, when the Fed lowered rates, the 10-year bond tumbled below 1%, and mortgage applications soared (paywall) as borrowers applied to take advantage of historically low mortgage rates. The huge number of new applications and the massive payoffs of existing loans greatly reduced the value of existing servicing portfolios, and the secondary market has ground to a halt.
At the end of March, 6.65 million people filed for unemployment, and this will have a ripple effect on mortgages. Simultaneously, “the availability of conventional loans dropped 24.2% in March, while jumbo loan availability dipped 36.9%. Government loans, which include USDA, VA and FHA mortgages, fell 6.6%.” All of these changes will likely have a negative impact on the housing market. In fact, it is expected that we will see the biggest number of mortgage delinquencies in history.
At this point, we are all trying to make sense of the new CARES Act. The bill has done a lot to take the burden off the shoulders of everyday Americans, but not enough has been done to help mortgage servicers. When borrowers are temporarily forgiven their obligations to pay back loans, the servicers are left holding the bag, which will result in tighter lending restrictions across the board. This temporary fix may do more long-term harm than good when it comes to the entire mortgage industry.
If borrowers don’t make their monthly payments, they will be protected by government mandate. However, mortgage servicers are still required to advance the principal and interest amounts to bondholders. This creates a problematic dynamic for the mortgage industry, and without a solution, it could throw the housing market into further turmoil.