We are in unprecedented times. Hindsight is 2020 (pun intended), and while we do not have a crystal ball, we can look to the past to better understand the present, and thus what should be in the future. My goal in writing this article is to explain what drives market forces, and how these forces may impact homeownership in the community I am grateful to call home.
I have been in the lending industry for over two decades. I have seen rates at over double what they are today, greed drive people to unstable situations, tumultuous changes in guidelines, funding abilities, terms and choices. I ran an Operations Team during the Great Recession of the early 2000’s and have been in the Top 1% of Mortgage Originators since the second year I started originating loans*. Yet while the situation before us is certainly very different than anything we have seen before; it also bears a resemblance to the uncertainly of the not-so-distant past.
The main difference between now and then is that this instability is being created by external, versus internal, events in the housing market. Let us break that down.
Back in 2008, the majority of loans that were written – or “originated” – did not verify income or assets, and barely verified credit and identification. Sure, documents had to be notarized to confirm the identity of the borrower at closing, however there was less scrutiny as to the verification of social security numbers, residency, and sources of funds for closing. Nowadays most loans that are originated are fixed rates. Income is documented, assets are tracked from being seasoned in one’s account through to the closing table.
Simply put, the mortgages that exist today are more stable. It is a process. No more do the “Fast & Easy” loan types exist. Any sort of reduced documentation is based on the sharing of data between credit reporting agencies, your employer or banking institution, and your lender. Except for the U.S. Department of Veterans Affairs Interest Rate Reduction Loan (IRRL) – wherein its simply a matter of a mortgage credit report and a few pertinent pieces from your current loan – a borrower must comply with a lender’s need to document the “Ability to Repay” as demanded by the Dodd-Frank Act of 2010.** There are no forward mortgages with negative amortization – or those that defer interest, ticking up the amount one owes over time. Outside of a Line of Credit, which is usually adjusted along with the Federal Reserve’s Federal Funds Rate,*** very few loans exist that adjust frequently.
Today’s loans are not those of the Wild West of days past.
This is not to say that economic hardships do not impact the housing industry, but simply that this time, it’s different. This time, we are ALL being impacted. Concern over one’s ability to afford their housing is more related to the impact of the current pandemic on one’s income source. The COVID-19 coronavirus has stopped or reduced employment for many. Thus, while your payment may not change, the income you have been relying on may be changing.
The good news is that there are more options today than existed then. In 2013, California put into law the California Homeowner Bill of Rights.**** This means more transparency in the foreclosure process, should it even come to that point. Currently, Fannie Mae and Freddie Mac are assisting homeowners who are facing difficulties directly due to COVID-19.***** You must still qualify for this assistance, and I urge you to review in detail such requirements and options.
But what about the rumors of companies going out of business? That loans are no longer available?
It is true that economic instability can reduce the availability of funds in the secondary market. If there is less demand for loans, then there is less money being used to supply loan options. Forbearance doesn’t mean that the debt is forgiven, it means it is delayed. Companies that rely on you to pay your mortgage to employ their staff still need you to do so to keep their economies going. Companies that were giving loans based on bank statements versus tax returns, or at higher ratios of loan to home value, or lower credit scores, are seeing less demand for their products. They may have loans that they have originated, but that are no longer desirable due to concern of the economy’s general stability – aka that the ability for these borrowers to repay the debt they’ve incurred is reduced. Would you want to invest in something that may not pay you back? Probably not.
The housing industry is one of the greatest examples of supply and demand that the everyday person understands. Prices are higher when demand is high. When supply of money is less expensive, someone can afford more. We are very simply seeing a reduction in demand for alternative lending products. We have not seen reduction in the supply of most conforming loans. We have not seen a reduction in demand for a well-priced, well-maintained home. I remember, back in 2009, when guidelines were changing so fast that, as an Underwriter, I had to literally print a guideline that matched the origination date and time of the loan. I remember people walking into our office, saying their Loan Officer promised them a fixed rate if they just signed the papers in front of them and gave them $500 in cash. We are not there now.
I anticipate that we will see more changes in the secondary markets in the weeks to come. I believe that companies that ran super skinny on their margins may not be around forever (think: running an expensive household with on dollar in the bank and no savings). The Federal Reserve will continue to buy Mortgage Backed Securities (MBS), but at this point it’s kind of like giving shots to the drunk people at the bar: they don’t want to get sober, they just want to offload what they already built up.
Yet it will turn. We will get back to work. We will see normalcy come again. This too shall pass.
In the meantime, our greatest asset is to follow the health and safety standards being put forth by our healthcare providers, the government, and the Center for Disease Control. We must replace fear with faith. We must work together to support our local businesses as much as possible. We must stay socially distant, yet together. Make smart decisions, take care of your mental and physical health. Show love. This is OUR community, OUR world, and OUR lives. It is our choice on how we move forward, it always is.
Austin Lampson NMLS#517060 | Homeowners Financial Group USA, LLC | NMLS#93718 | Licensed by the DBO under the CA RMLA 4131292 | Equal Housing Lender
This is not a commitment to engage in a loan transaction. All loan products and loan amounts may not be available in your area and are subject to credit and property approval pursuant to agency and investor guidelines. Information, rates and programs are subject to change without prior notice. Some products may not be offered directly by Homeowners Financial Group USA, LLC (HFG) but are offered through a lender with whom HFG has a business relationship. Other restrictions and limitations may apply.
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