COVID-19 vs Mortgages
By now everyone’s realized that these are unchartered waters we, as a society, are navigating. The entire world has been essentially turned upside-down in a matter of a couple month as we continue to fight the spread of the Coronavirus. This pandemic has had some major impacts on the economy, including real estate, and more specifically, mortgage lending.
In February 2020, when people started realizing the impacts this would have on the markets, investors began pulling money out of the stock market and investing in less “risky” assets like bonds and Mortgage Backed Securities (MBS). This spike in the MBS & Bond markets caused rates to temporarily drop to historic lows. As people caught on to this significant rate decrease, more and more locked in refinances. This influx of mortgage applications caused a supply/demand problem. Banks and lenders had tons of demand but didn’t have the capacity to handle all the new business all at once; therefore causing a shortage with mortgage “supply.” To combat this, lenders increased rates and application turn times to slow down applications. Shortly thereafter, as lenders were funding billions of new loans, the MBS market became flooded. Investors were pulling money out of the market completely and keeping their assets in cash causing a major decline in the purchasing of MBS. This caused rates to skyrocket 1-2% in a matter of a couple days.
With rates increasing at an unforeseen rate, social distancing actions imposed, and unemployment rates exponentially growing the feds had to find a solution to keep the public from not being able to pay their mortgages and losing their homes. In March, congress implemented the Coronavirus Aid, Relief and Economic Security (CARES) Act. In short, the CARES Act offers several types of assistance to businesses, workers, the healthcare systems, and the general public.
One of the biggest pieces to the CARES act is the implementation of mortgage deferments and forbearance periods. This Act gives homeowners the ability to defer or suspend mortgage payments for up to 180 days (sometimes more depending on the specific situation) by simply calling their mortgage servicer and asking to be placed on deferment/forbearance. As an investor, this idea sounds great and seems like it would help maximize cash flow especially during these tough months where tenants may not be able to pay rent and the stock market being at a low point. However, just like anything in life, money isn’t free. What people fail to realize, and what these mortgage servicers are not advertising, is that these deferments have some serious setbacks and really should only be taken advantage of if it’s truly needed. One major setback to this is that once the deferment/forbearance period is up, the consumer will have to come up with all the missed payments in a lump sum when their next payment is due. If it isn’t possible to come up with all those missed payments, the only other option (aside from selling the home) is to do a Loan Modification to change up the terms of the existing mortgage to include the missed payments - causing the monthly payment to increase. Having a loan modification is considered a negative housing event when it comes to credit. So, by completing a loan modification, it hurts the chances of being approved for another mortgage for several years down the line while increasing the minimum monthly mortgage payment.
Another issue deferment/forbearance has on the real estate market is it can and will cause home values to decline. This is because, even during the deferment period, the mortgage servicer still must pay their liabilities, the borrowers’ taxes, and insurance on the property. If they aren’t getting the monthly payments from their borrowers, this becomes very difficult. What mortgage companies have done to take some of the burden off their shoulders, is tighten mortgage lending guidelines, making it more difficult to be approved for a loan…especially for people who are likely to utilize the deferment option. Less buyers in the market causes a supply and demand issue: lots of sellers and inventory, but not many buyers. This in it of itself causes home prices to decline.
Moral of the story: just like in every industry, COVID-19 has had some major impacts on mortgage lending. The CARES Act was implemented to help people in need and has many positives to it. However, the mortgage deferment/forbearance piece should really be a worst-case scenario and should be taken into much consideration before utilizing it. If you need to take advantage of it, that’s what it is there for. But if you can make your monthly mortgage payment – do it, so you aren’t put in a sticky financial situation down the line and potentially risk decreasing cash flow on your investments.
Mark Tomaszewski | LO Licensing: AZ LO-0930956 CA-DBO 1379363 NMLS-1379363 Company Licensing: AZ BK-0904164 California - FLL603L266 / RMLA4130661, Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act | www.peoplesmortgage.com/privacy-policy NMLS-6274
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