People are suffering due to the economic mess we put ourselves into. It’s no more obvious than watching the local news at night seeing people line up for hours to get handouts of free food. If you noticed, these people aren’t bums. These are proud people driving nice cars – a sign that they were at one point economically fine. One can draw an easy conclusion that if they don’t have money for food, they probably don’t have money for their mortgage either.
When a state’s governor decides to extend the closure of their state, there’s an additional waive of unemployed. Businesses that kept employees on, thinking the lock-down would only be a couple of weeks, are now forced to close – sometimes permanently. On Oahu, Likelike drive-in was one such business that could hold out for a short period, but when Governor Ige extended Hawaii’s shutdown till the end of May, they realized they couldn’t hold on, and closed for good. All their employees are now out of a job.
To compound matters, if you are one of the lucky still to receive a paycheck, you may not know just how screwed-up things are for the unemployed in Hawaii. Our state’s unemployment system is more than a mess. The computer system they use is running software running on a language developed in the 1950’s. Our friends, our kids, our extended family members who filed for unemployment benefits still haven’t see a check. They can’t even connect to the state’s system to file what’s required or get updated information on their claim.
So how has all of this impacted the mortgage world?
We warned of this issue weeks ago, and the ramifications of it are now starting to hit home. Nearly 11% of all mortgage holders in the US have opted for forbearance. Forbearance is when your lender allows you to not make your payment and not foreclose on you. You actually don’t skip your payment; you are just deferring your payment to a later date. Sounds innocent, but you still owe the money, and it is due at the end of your forbearance. If you can’t make your payment now, how are you going to come up with 6 months (or longer) of payments all at one time when they are due?
Buy wait, Fannie and Freddie have come to your rescue (I say facetiously!).
If you do go into forbearance, Fannie and Freddie have issued guidance this week for your servicer to enter into a loan modification with you to avoid a lump sum payback. But here’s the catch: so long as you are in a forbearance, you cannot refinance your mortgage to a lower rate. Once you are out of your forbearance and into your loan modification, you must have made 12 on time payments under that modification before you can refinance. That means that if you take a six-month forbearance, you are prevented from refinancing for a minimum of 19 months from now.
Obviously if you have lost your source of income, forbearance is a much better option that defaulting and going into foreclosure. But if you can make your payment, and just looking to game the system, the system will game you. Mortgage rates are expected to remain low for a while, but having to wait 19 months, may mean you’ll miss the boat on lower rates.
1st Payment Defaults:
We are truly living through some unusual times. Historic low mortgage interest rates combined with millions losing their jobs – seemingly overnight. There have been an unusually large number of mortgage transactions that closed recently, both purchases and refinances, where after the loan closes the borrowers immediately request a forbearance.
I am sure that many innocent homeowners had no choice, and their timing was very unfortunate, that right after they closed their loan, their financial situation immediately changed. But there’s a whole bunch of people out there that saw a loophole in the forbearance guidelines – you don’t have to prove any financial hardship; you just need to state you have one. Those people felt they could capitalize on getting a lower rate AND skip payments for 6 months or more.
This has impacted mortgage lending significantly. In the past when there was a 1st payment default, that loan was ineligible to be purchased by Fannie or Freddie. Now, the new rules are that Fannie and Freddie will buy that loan, but with a HUGE financial penalty. If you thought paying a discount point or two was high to get a lower rate, the fees being assessed by Fannie and Freddie are either 5 points or 7 points, depending on the loan’s characteristics.
Lenders don’t make anything close to that amount on each loan. The average is about one-half point. So how do they offset potential losses? Last week we informed you that many lenders were internally increasing their margins on loans which results in either more points to the borrower for that lower rate, or the borrower would be offered a higher rate at the same cost.
The Death of the Cash-out Refinance:
This week many of the nation’s largest lenders decided to no longer hide the huge fees that could be potentially assessed against their loans, so they have decided to hike fees on loans with the riskiest characteristics. As of May 1st, search the internet for rates to obtain a cash-out refinance. You’ll be shocked! On Thursday, if you had good credit and decent equity, a cash-out refinance had a rate of around 3.500% with zero points. One day later, and I saw some lenders at 3.750% with 4 points (yikes!).
Before you panic, the good news is that not all lenders have implemented this price change for the worse. But it does emphasize the need for consumers to be VERY diligent when shopping for mortgage rates. I would also strongly suggest that if a cash-out refinance is in your future, you do it sooner rather than later.
Say Goodbye to HELOC’s:
While I have not seen any of Hawaii’s local banks adjust their guidelines for HELOC loans, there’s a growing trend on the mainland for banks to reduce the maximum loan-to-value on the HELOC loans they originate. It is also important to note that if you currently have a HELOC, there are provisions in the documents you signed that allow the lender to arbitrarily reduce your line amount at any time.
While neither of these measures eliminates HELOC loans, HELOC’s are primarily a higher LTV product. Scaling back the LTV will result in fewer people needing them.
If you’ve been reading my newsletter for any length of time, and certainly since this financial mess started just a few short weeks ago, you’ll see that the mortgage industry is in great flux right now. There are huge changes happening almost daily. There are still so many variables with so much uncertainty in the world. I will do my best to digest the complex and present it here in a manner you can benefit from.