Mortgage refinancing
I will do my best to speak to both consumer and mortgage industry people on this topic. It affects everyone. With that in mind, the following is a list of questions that loan originators have been asking. Consumers might not be familiar with all the terms, but the rest of this article will speak to everyone.
Why are so many non-QM lenders raising rates or disallowing new apps?
Why can’t I do cash-out non-QM or Jumbo right now? Or Non-Owner, high LTV, low FICO?
Why are my FHA/VA rates suddenly terrible?
Why am I suddenly seeing MASSIVE hits for certain FICO/LTV combinations?
Why am I suddenly hearing more than I’ve heard since 2008 about lenders potentially being in trouble?
Why are lenders changing rates MASSIVELY from day to day?
Why are different lenders so far apart from one another in terms of what they’re quoting?
The mortgage industry, like many others, is dealing with more than one problem right now. And like many other industries, the problems arose from the fastest-ever economic adjustment the world has ever seen–not from some inherent wrongdoing or mism anagement. So if you hear someone comparing 2020 to 2008 and implying the mortgage market is bad or evil in some way, they’re misguided. People love to freak out about serious stuff. And stuff is indeed serious.
This is a multifaceted issue with two main components:
1. The general market disruptions brought about by coronavirus and
2. The impending mortgage market consequences from the soon-to-be-passed disaster relief bill (which is unfortunately also referred to as “the stimulus bill”).
Part 1. General Market Disruptions Brought About By Coronavirus
If you really want to do some reading, my newsletters lay a good foundations for this. You’ve already heard about the massive stock losses in Feb and March. This coincided with massive bond market gains. Mortgages are part of the bond market and gains typically mean lower rates.
In fact, the bond market improved so much so quickly that it was too much of a good thing for the mortgage side of the bond market. “How could rates be too low?!” you may be wondering.
Investors who buy mortgages are planning to make money on interest paid over time. They pay extra upfront for the right to collect that interest. If the loan is paid off earlier than they expect (due to rapidly falling rates and refinances), they either lose money or simply make much less than they expected. As long as the risk of rampant refi demand remains high, lenders remain hesitant to pay what they normally would for mortgages. This makes rates go higher or stay flat even as other long-term rate indicators, like 10yr Treasury yields, plummet to all-time lows.
In fairness, mortgage rates made it to all-time lows too, but not nearly as convincingly as Treasuries. Moreover, those low rates resulted in the biggest-ever weekly jump in refinance demand, and remember, that’s not good for mortgage valuations (and thus not good for rates). In addition to mortgage investors pulling back due to refi fears, the entire financial market was frantically trying to sell everything it could in order to raise cash.
This isn’t “raising cash” in the sense of drumming up funding for some new venture. This is a repositioning of assets in response for a crisis. Stocks, bonds, whatever… All of it carries some degree of risk and none of it can be used as day-to-day capital the same way as cash. Massive global economic and financial market emergency? Investors start acting like this guy from The Fifth Element.
The cash grab and the refi fear meant mortgage investors had 2 big reasons to sell, and again, when they’re selling, rates are rising. This is why mortgage rates jumped higher at the fastest pace in history 2 weeks ago, even as 10yr Treasury yields remained at levels that convinced many savvy borrowers that mortgages should be doing much better.
A market phenomenon known as a “margin call” added to the volatility in the mortgage market especially. This refers to big lenders and their trading partners constantly trying to settle up their ledger with one another in order to maximize cash in hand. When bond prices are falling quickly, it’s the lenders that are demanding cash from dealers. The bigger the move in bonds, the bigger the demands on the cash of the entities responsible for providing mortgage financing.
All of the above added up to a major threat to the bond market’s ability to provide credit. That’s a complicated way of saying people and businesses and banks were at risk of not having the cash they would otherwise be accustomed to. Let’s say you remodeled your home with a credit card and then were expecting to quickly get a refinance to pay off the debt, but due to the cash crunch in the bond market, your loan was heavily delayed or not possible at all. You’d now be looking at a few high interest payments at the very least. Maybe that’s no big deal to you, but multiply it by the size of the entire financial system and it adds up.
This is precisely why the Fed stepped in with hundreds of billions of dollars of bond buying guarantees and trillions of dollars in short term loans to the biggest banks. Don’t think of these loans like “printing money.” They merely provide a quick and easy way for big banks with a ton of assets to turn those assets into cash without trying to get that cash from other banks who are also trying to get cash. This gives banks time to do what’s necessary in order to repay the cash to the Fed and reclaim the assets they initially put up for collateral (jargon term for all this = repurchase agreement or “repo” for short).
The unfortunate consequence of the Fed buying massive amounts of mortgage bonds was that the margin call issue started to go the other way. Now, instead of mortgage lenders seeking cash from the bigger players, the bigger players were owed cash from mortgage lenders. This exacerbated the problem discussed in part 2.
Part 2: The Disaster Relief Bill is a Disaster For The Mortgage Market
To be fair, it’s not just the bill, but rather an underlying problem it fails to address. 3.3 million people filed for unemployment this week. More are on the way. Many of them will not be able to make ends meet. Some of them will sell their homes, refi for a lower payment (if they can qualify without their previous level of income), or in the worst cases, default on their payments. Mortgage investors are protected from the loss of interest and principal in the event of default in most cases, but defaults nonetheless cause the same valuation issues as a refinance. And remember, rapid refi demand makes investors less interested in buying mortgage debt.
Now consider the disaster relief bill. It encourages millions of Americans affected by coronavirus-related income disruptions to seek a forbearance on their mortgages. This means no payments for 6 months at minimum. That, in and of itself, is a great thing for homeowners. It provides relief when it’s needed most. There are some serious, unintended consequences, however.
The investors who buy mortgages have a guarantee to receive timely payments. If the homeowner can’t pay it, the loan servicer is supposed to. If the servicer can’t pay it, the housing agencies (Fannie, Freddie, Ginnie) foot the bill. And finally, if the agencies can’t pay, taxpayers foot the bill because Treasury will have to provide a “draw” for the agencies.
As the bill was written by the House, it stated that The Fed and Treasury would extend credit to mortgage servicers that needed it due to COVID-19-related delinquencies, defaults, or forbearances. The bill passed by the Senate (and sent back to the House) has no such clause, nor any protections for servicers or GSEs. While there is reason to believe that a section of the bill could/should still cover servicers in need, the absence of a concrete promise has many of them understandably cautious.
Beyond that, even if servicers are ultimately covered by a Fed credit facility inside or outside of the disaster relief bill, the fact remains that forbearances make loans less profitable for a variety of reasons. Before you pound your fist and curse the evil banks for only caring about profit, that’s not at all what I’m saying. Lenders WILL continue to offer financing to people who need it. But at the moment, it’s very hard for them to know how to assign cost/value to the riskier edges of the mortgage market credit spectrum.
In other words, if you need a big loan without much equity, a low credit score, and non-standard income documentation, you might find such programs completely unavailable or simply priced too poorly to make sense. Investors are not interested in owning such debt until they get more clarity, both on the containment of coronavirus and the ability of servicers to keep payments flowing in a timely way.
Even more normal parts of the mortgage market are suffering because of how they’re expected to fare during the COVID crisis response. FHA/VA loans are an examples. This has to do with rules on how servicers pay investors. In general, the average FHA/VA loan is on the hook for a larger percentage of the monthly payment than the average conventional loan. Investors could also be feeling more cautious about borrower demographics in FHA, where first time homebuyers with lower cash reserves may be less able to weather a financial storm. If that makes those borrowers more likely to seek forbearance, it raises questions for investors that don’t have concrete answers in the stimulus bill.
The Bottom Line
Any loan that’s not right down the middle of the conventional spectrum raises questions about how it will impact lenders as they navigate what is easily the largest and fastest surge of forbearances the mortgage market has ever seen. Every loan raises questions. Due to their servicing rules or risk profiles, some loans raise more questions than others. Those loans have been absolutely demolished by an absence of investor demand. To reiterate, lower demand among investors = higher rates.
In essence, despite extraordinarily high prices on the bonds that underlie the top tier mortgage debt, much of the mortgage market is broken by the volatility and uncertainty surrounding COVID-19. Some parts will heal quickly as bondholders better understand their forbearance protections. Other parts will face a tougher road due to the impending recession (high LTVs especially). In all cases, TIME and STABILITY (in markets, the economy, and epidemiology) will be required before rates and product offerings return to where they were.
stuyheights
in General Discussion 5 years and 2 months ago
31
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31 replies
xchx | 5 years and 2 months ago
What rates are people getting? I was quoted 3% on a 30-year fixed by John Prom at Homebridge, who I would recommend.
Guest User | 5 years and 2 months ago
When did you get this rate? I got a 3% on a 10 1/2 yr ARM but that was a month ago and rates have fallen since.
krobertson
in General Discussion 5 years and 2 months ago
Looking for a lender or mortgage broker to refinance with. Any recommendations on folks to contact? For example someone like Homebridge that xchx just recommended.
Prefer not to refi with one of the big banks, e.g. Citi, BoA, Wells, Chase, etc.
Guest User | 5 years and 2 months ago
I’ve used Rob Slifer in the past. He’s a great person and always thinking out of the box. He saved me when I had a challenging situation with my property. https://www.mortgagenetwork.com/rob-slifer
stuyheights | 5 years and 2 months ago
Rates have skyrocketed since Monday.
http://www.mortgagenewsdaily.com/consumer_rates/938445.aspx
nednedx
in General Discussion 5 years and 2 months ago
None of the big boys are eager to re-finance at this point. Our broker told us to hang tight…
BKALLDAY | 5 years and 2 months ago
I think the article speaks more of the Bond Market concerns because all of these loans (if not done right) could be an act 2 of the 2006 debacle. Also banks may not want to lower what they charge but banks also want to do business so I see them trending downwards in their rates as well. People are going to bum rush banks trying to get the best deals in case the Fed decides to raise interest rates but many economist see the Fed rate staying where it is through the end of the year so people can and should take their time to look for a good loan that they can afford with a a reputable bank. I also think banks should limit their exposure to developers and allow the middle class to solidify their intentions to own a home or refi the ones they have. The middle class is the straw that stirs the drink.
fiordiligi | 5 years and 2 months ago
Whatever you do, avoid Mr, Cooper (aka Nationwide). They bought my mortgage from another bank a few years ago, and were so awful to deal with (just pull up the complaints online – there were endless problems with paying my insurance, calculating my escrow, etc..) that I complained to the NYS Insurance Dept, and finally paid off the loan early to avoid having to deal with them any further.
astoriahomeowner
in General Discussion 5 years and 2 months ago
I’d take into consideration that the lower rates are designed to keep people borrowing, however, if peoples jobs, portfolios, business are earning less, you might feel the crunch, payments might feel relative.
daveinbedstuy | 5 years and 2 months ago
“I’d take into consideration that the lower rates are designed to keep people borrowing” HUH????
katdov | 5 years and 2 months ago
Rates have gone up. I’ve been quoted 4.25 by WF for 30 yr
BKALLDAY | 5 years and 2 months ago
@OGNewYork. How did you arrive at “lower rates are designed to keep people borrowing.”? Basically it becomes cheaper to borrow money. Only fools who take out equity on a property are the ones who will rue the day if their jobs, portfolios or savings goes South. If a bank is charging you 4 or 5% now but because of this Pandemic and it’s effect of the economy the Fed is letting banks borrow money at almost zero percent then you come out a winner if your choose to re-fi as long as you don’t max out your property value. I think if you can you should re-finance. Don’t take any cash out and you can do very well. But to each his own.
BKALLDAY | 5 years and 2 months ago
I recommend Bruce O’Kronley at Quicken loans. knowledgeable and professional. Fast close 30-40 days. All done electronically (except for the closing). He understands the NY market and works well with you for your needs. 313-373-2113 is his direct. Bruceokronley@quickenloans.com. If anyone decides to listen to what he has to say you may be surprised at how pleasant it is to deal with a human who for the most part stick with you from start to finish.
yudashasom | 5 years and 2 months ago
Wells never has the best rates, but they are fantastic to work with.
Rates are around 3.35 – 3.5% for a 30y fixed.
katdov | 5 years and 2 months ago
They do everything electronically now which saves pounds of paper. But if 3.35-3.5 is correct that they are almost a whole point higher
stuyheights | 5 years and 2 months ago
Rates aren’t there on refinances
BKALLDAY | 5 years and 2 months ago
@StuyHeights – Yes the rates are there if one utilizes a legitimate bank and it’s your Homestead property. If your credit is bad or you use a sketchy lender then that might make it a bad decision
stuyheights | 5 years and 2 months ago
BKallday- I am a mortage banker for 16 years and I am on the front lines of this and have many friends in the industry and I beg to differ. Call wells, chase, Citi or any other “legitimate” bank and get a rate quote for a refi on a jumbo loan and report back here on the rates you are quoted.
BKALLDAY | 5 years and 2 months ago
@StuyHeights – I am doing it now on my house and my locked in rate is 3.5% on a jumbo. But am not taking any cash out.