How is COVID-19 affecting Mortgage Industry, Interest Rates and You?

How is COVID-19 affecting Mortgage Industry, Interest Rates and You? 

The Mortgage Rates Puzzle

  • A lot of factors go into deciding your mortgage rate
  • Things like credit score are huge
  • As are down payment, property type, and transaction type
  • Along with any points you’re paying to obtain said rate
  • The state of the economy will also come into play

When you search for “mortgage rates” you’ll likely see a list of interest rates from a variety of different banks and lenders.

Unfortunately, this won’t tell you much without actually knowing why the rates are what they are and if they’re actually available to YOU.

It’s really just a bunch of numbers on a page. Shouldn’t you know how lenders come up with them before you start shopping for a home loan and buying real estate?

Simply put, the more you know, the better you’ll be able to negotiate! Or call out the nonsense…

THE CARES ACT AND MORTGAGE SERVICERS

Executive Summary

  • The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides substantial relief in the form of up to a year of forbearance to homeowners with mortgages backed by federal loans.
  • The Act, however, does not expressly provide for mortgage servicers, who stand to suffer a liquidity shortfall of as much as $100 billion due to this forbearance.
  • The resulting strain on the housing market could have immediate impacts on mortgage availability and price, and the ramifications for the broader economy could equal or exceed the stresses of the 2007-2008 financial crisis.

In the face of the economic and social disruption caused by the coronavirus, Congress has enacted three stimulus packages. With an estimated $2 trillion price tag, the third package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is perhaps the largest and most significant stimulus package in U.S. history.

The final iteration of the CARES Act includes several provisions designed to provide a reprieve to homeowners. Most notably, the bill provides significant relief to holders of mortgages backed by federal loans in the form of six months to a year of forbearance and immunity from eviction or fees relating to late rent payments. Absent from the CARES Act, however, is consideration of the loan servicers themselves, who stand to suffer a six-month income shortfall of their entire federal loan portfolio.

Before going in too much detail on the CARES ACT Let me first explain the mortgage money process.

Where does Mortgage Money Come from?

The Mortgage Originator

The mortgage originator is the first company involved in the secondary mortgage market. Mortgage originators consist of retail banks, mortgage bankers and mortgage brokers. While banks use their traditional sources of funding to close loans, mortgage bankers typically use what is known as a warehouse line of credit to fund loans. Most banks, and nearly all mortgage bankers, quickly sell newly originated mortgages into the secondary market.

-Mortgage Broker

A mortgage broker is an intermediary who brings mortgage borrowers and mortgage lenders together but does not use their own funds to originate mortgages.

-Mortgage banker 

A Mortgage Banker or Loan Officer is a company, individual, or institution that originates mortgages. Mortgage bankers use their own funds, or funds borrowed from a warehouse lender,

-Warehouse Line 

lending is a line of credit given to a loan originator. 

  • Warehouse lending is a way for a bank to provide loans without using its own capital.
  • Financial institutions provide warehouse lines of credit to mortgage lenders; the lenders must repay the financial institution.
  • A bank handles the application and approval of a loan and passes the funds from the warehouse lender to a creditor in the secondary market. The bank receives funds from the creditor to pay back the warehouse lender and profits by earning points and original fees.

Aggregator

Aggregators are the next company in the line of secondary mortgage market participants. Aggregators are large mortgage originators with ties to Wall Street firms and government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac. Aggregators purchase newly originated mortgages from smaller originators, and along with their own originations, form pools of mortgages that they either securitize into private-label mortgage-backed securities (by working with Wall Street firms) or form agency mortgage-backed securities (by working through GSEs).

-Government-Sponsored Enterprise (GSE)

  • Fannie Mae - Federal National Mortgage Association — is a government-sponsored enterprise that makes mortgages available to low- and moderate-income borrowers. It does not provide loans, but backs or guarantees them in the secondary mortgage market.
  • Freddie Mac - Federal Home Loan Mortgage Corporation — 
  • Ginnie Mae - Government National Mortgage Association — a U.S. government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBSs) 

Guarantees Government loans such as 

The main difference between Fannie, Freddie and Ginnie: Ginnie Mae is known as a guarantor for federally backed loans, while Fannie and Freddie guarantee loans themselves. ... Fannie Mae typically buys loans from larger commercial banks. Freddie Mac purchases mortgage loans from smaller banks and credit unions, also known as “thrift” savings institutions.

Securities Dealers

Security Dealers package pools of loans into different types of sellable products the 3 most common are:

These pools of money are packaged with the end goal is to sell them as securities to investors according to different criteria such as:

  • Prepayment characteristics
  • Enhanced credit ratings
  • Rate

The dealer make the spread or difference between the buy price and the sell price of the Mortgage Backed Security depending on the packaging and structure of the package or pool of money to be sold to an investor.

Investors

The investor is the end users such as:

  • Mutual funds
  • Pension funds
  • Insurance companies
  • Banks
  • GSE’s
  • Hedge funds
  • Foreign governments

The end user are expecting profits based on the 

  • Interest rates
  • Structure of the mortgage
  • Prepayment risk
  • Rate risk
  • Credit risk

Hedge Funds are typically the largest investors in mortgage products with the lowest credit ratings or least sought after structured mortgage products because they carry the highest gains but also have the largest interest rate risk.

GSE’s typically have the largest portfolio of mortgage products.

Mortgage Servicing 

A Mortgage Servicers  job includes sending monthly payment statements, collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow funds), remitting funds to the note holder, and following up any delinquencies. The service company takes over the loan process and handles all the payments. Selling a mortgage allows the banks to initiate new loans since banks have limitations as to how much they can lend, which can be based on a number of factors, including how much in deposits the bank is holding. Also, a bank might make more profit initiating new mortgages than servicing existing ones.

-Remember a Mortgage Servicer is just who you make your payment to in most cases they are not the owner of your loan or the MBS that your loan is a part, however a Mortgage Lender can be a Mortgage Servicer as long as the lender is set up to handle deposits.

-Mortgage Servicer cannot change the structor of your loan they can only collect, process, tracking loan payments, sending reminder notices for missed payments, filing foreclosure documents in the event the loan is in default.

  • A mortgage lender is a bank or financial company that lends money to borrowers to purchase a home.
  • A mortgage servicer handles the payment processing and is the company that sends the monthly statements to the borrower.
  • If your mortgage is sold, you'll have a new service provider, which should notify you of their address to send payments within 30 days.

  • Conclusions

In the face of the economic and social disruption caused by the coronavirus, Congress has enacted three stimulus packages. With an estimated $2 trillion price tag, the third package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is perhaps the largest and most significant stimulus package in U.S. history.

The final iteration of the CARES Act includes several provisions designed to provide a reprieve to homeowners. Most notably, the bill provides significant relief to holders of mortgages backed by federal loans in the form of six months to a year of forbearance and immunity from eviction or fees relating to late rent payments. Absent from the CARES Act, however, is consideration of the loan servicers themselves, who stand to suffer a six-month income shortfall of their entire federal loan portfolio.

The CARES Act has two key implications for housing. First, it provides significant relief to holders of mortgages backed by federal loans in the form of six months forbearance and immunity from eviction or fees relating to late rent payments. Absent from the CARES Act is consideration of the loan servicers themselves, who stand to suffer a six-month income shortfall of their entire federal loan portfolio. 

-It must be assumed that this industry would seek for assistance under Titles I and IV of the CARES Act, with coronavirus relief via the Small Business Administration (SBA) or the Treasury. 

-Second, although increased funding to the CDBG program will be welcomed, particularly by states who have broad latitude as to how to they employ this funding, operationally it will remain a challenge to distribute this assistance nationally and with any speed.

At this point we have no concrete information about how COVID-19 and CARES ACT will affect Mortgage Servicer or the Owners of the MBS but we are certain that if many people take the forbearance option the servicers will not be able to meet their obligations with the owner of the MBS and that could create an even bigger issue than the 2008 mortgage crisis. 

This Blog is Provided by Mick Burke CEO and Qualifying Broker of Hunter Chase Realty, Inc. 

For additions information about all things Real Estate Related and for additional information about purchasing a home or acquiring financing please contact,

Mick Burke - The Hunter Chase Team

505-228-1500

Mick@hunterchaserealty.com

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