Link Between COVID-19 & Mortgage Loans
As the COVID-19 shelter-in-place directive is impacting all areas in our society and the global society at large, the effects are being felt in the mortgage markets as well. Mortgage interest rates that fell to the 50-year low in the last week of February and the first week in March, have since increased and then started falling again in the last week (ending April 10th).
Reductions in Conforming Loans
This more recent rate reduction applies to conforming loan products only.
Conforming mortgage loans are those that meet the loan limits and underwriting guidelines for mortgages being sold to Fannie Mae and Freddie Mac.
The standard conforming loan limits nationwide now are:
- single unit residential properties (Single Family Detached Residences, Condominiums, and Townhouses) – $510,400
- two-unit properties – $653,550
- three-unit properties – $789,950
- four-unit properties – $981,700.
Mortgage loans that fall within the standard conforming loan limits and guidelines are thus seeing fixed interest rates head back towards the 50-year low levels again, as we gain some distance from the massive market volatility of six weeks ago.
Increases in High Balance Conforming Loans
In 2008, the markets were reeling from what became known as the beginning of the Great Recession. At that time, Congress authorized a temporary increase of the conforming loan limits — part of the 2008 economic stimulus package. This “Temporary High Balance Conforming” category still exists today.
The high balance conforming loan limits currently are:
- single-unit residence – $765,600
- duplex – $980,325
- triplex – $1,184,925
- fourplex – $1,472,550.
Mortgage interest rates for the high balance category are usually within .125% to .250% higher than for mortgages that fall under the standard conforming loan limits.
Over the last two weeks, we have seen rates in this high balance category run an increase of between 1% and 2% higher than the standard conforming interest rates. For some high balance mortgages that fall into higher-risk categories, not only have the rates increased but the origination fees have also increased; in some cases high enough to indicate that lenders are trying to push borrowers away from this loan category.
The higher risk loan types include refinances where the borrower is taking additional cash out of their equity (cash-out refinance), purchases and refinances of investment properties, and lower money-down payment purchases. Lower credit scores are also having a very negative impact on interest rates for mortgages in the high balance category.
Nonconforming Jumbo Loans
Because of COVID-19 and mortgage loans repercussions, the industry has taken a pause overall right now and is not offering many loan products for mortgage loans that do not conform to Fannie Mae/Freddie Mac loan limits and guidelines, a.k.a. non-conforming or “Jumbo” mortgages.
Jumbo lending started disappearing the last week in March/first week in April. By April 10th, there were virtually no lenders offering Jumbo mortgages. Those that are still offering Jumbo mortgages are charging rates 2% to 3% over the rates previously offered five weeks ago.
This action by the market is not unprecedented. The last time Jumbo lending disappeared it happened on one day, August 2nd of 2007. On that day, all Jumbo mortgage interest rates spiked up to over 4% higher and charged over 5% in origination fees at those higher rates. Conforming interest rates went up 1% on that day alone.
Even though we are back in historically bad times for this category of mortgage lending, there are some solutions to the current high balance conforming and Jumbo mortgage rate increases/pause.
The second-mortgage lenders my team and I work with to provide first and second simultaneous mortgage solutions, also known as piggyback mortgages, are still lending.
That means I can take a client’s high-balance or Jumbo mortgage and split it into two pieces, taking out two mortgages simultaneously to achieve the same funding goal. For example: If a borrower is looking for a $1 Million mortgage loan for the purchase of a single-unit residential property, that mortgage can be broken up into two loans. The first mortgage could be capped at either the standard conforming loan limit of $510,400 or at the high balance conforming loan limit of $765,600, with the remaining loan amount fulfilled by the piggyback second mortgage.
There are fixed-rate options for a piggyback second mortgage, but those rates tend to be 2% to 3% higher than first mortgage fixed rates. The more prevalent piggyback second mortgage product is a simultaneous HELOC (Home Equity Line of Credit) where the rate is based on the prime rate, currently 3.25%, plus 1% for a rate of 4.25% APR. Loan amounts for the piggyback second mortgage tend to be capped at $500,000.
Most borrowers who use the piggyback loan option will refinance six months down the road, combining the balances on the first and second mortgages into one new first mortgage. By that time, high balance conforming rates are likely to be back in line and Jumbo mortgages should be available again.
Tightening Lending Guidelines
Mortgage lenders and investors are mitigating risk in other ways as well. The industry has seen a tightening of lending guidelines within the conforming category overall. Some lenders are even adding their own increased guidelines above and beyond what Fannie Mae/Freddie Mac are implementing.
Scrutiny of Income & Assets
Self-employed borrowers are facing even more scrutiny with additional requirements to validate the business’ ability to remain viable through the COVID-19 crisis.
Monthly rental income for rental properties may not necessarily be used to offset the monthly liabilities on existing rental properties or help buyers qualify to purchase rental property. Portfolio and retirement assets that are invested in the markets and are not cash accounts may face additional scrutiny due to the recent large losses in market valuation.
Refinance Volume Beyond Capacity
With the occurrence of COVID-19 and mortgage loan reductions at this time, it is also worth noting that mortgage lenders and investors have been hit with five times the normal volume of mortgage refinance applications and are understaffed to handle the sudden increase. Some of the mortgage banking executives that I communicate with on a regular basis are indicating that:
There are $10 Trillion worth of existing mortgages that would have benefited from a mortgage refinance, when we saw rates hit bottom six weeks ago. However, the mortgage industry can only support $2 Trillion of that volume this year.
Thus mortgage lenders are increasing their rates at various times to slow down new business, as well as in response to a general slowing in production. Some lenders are taking up to three weeks to underwrite refinances that normally would take 24-48 hours.
Many institutional lenders (the big banks), through their retail channels (bank branches, internet, phone), are now projecting that it will take months to complete the underwriting process, and even longer to close. This is the norm: every time we hit another refinance boom, it takes the big banks three to four months or more to close a refinance.
The current refinance boom is so overwhelming that some banks are not accepting refinance applications right now, because they simply cannot handle the current volume, and from their point of view, they don’t need or want to service any more refinances.
COVID-19 Rescue Plan: Forbearance
Another issue many mortgage holders need to be aware of is the provision within the COVID-19 rescue plan to allow borrowers to take a forbearance on their mortgage payments.
While this forbearance option is necessary for many borrowers who are out of work right now, taking the forbearance could hurt those who can afford to keep making their payments.
If you want to either take advantage of the low-interest rates for a mortgage refinance now, or if you are in the market to purchase a home and need a new mortgage to do so, taking forbearance on your current mortgage will derail your plans.
Forbearance may be necessary for many people, but for those whom it is not necessary – don’t take the forbearance.
Because in order to qualify for a new loan, you need to show continuity of payments on your current debts. By taking a forbearance, you are breaking that continuity; one of the standard lending guidelines is to verify the potential borrower’s last 12 months of consecutive, on-time payments.
Forbearance Is Not Forgivable
Also please be aware that the payment forbearance is not like the Small Business Administration loans for business owners where the some or all of the SBA loans are forgivable. The mortgage payment forbearance will be collected either at the end of the forbearance period, likely 90 days, or in some cases the deferred amount may be added to the mortgage principal and paid off at the end of the loan term. The second option is best for the borrower, but whether you would be able to pay back the deferred amount at the end of the 90 days, or have that amount spread over future monthly mortgage payments, will be determined by the lender.
I don’t believe the deferred payments will affect credit scores, as long as the borrower works out and follows their repayment plan with the lender/servicer.
For more about forbearance, see Understanding Forbearance During COVID-19.
COVID-19 & Mortgage Loans: Don’t Be Discouraged!
Despite the current crisis with COVID-19 and mortgage loans adjusting, the effect on people’s jobs, the fluctuating values of their portfolios, and the ups and downs of the current real estate market in general, I am still getting a heavy flow of potential borrowers who want to pre-approve for a mortgage!
Even with many government offices being closed or open only part-time, appraisers having to follow extra precautions when inspecting properties, and escrow office employees working from home, know this:
My team and I are still getting mortgages funded for home buyers and homeowners. There can be some delays, but we are finding workarounds for every obstacle that we encounter.
If you are in the market to purchase or refinance, the current crisis may not necessarily prevent you from achieving your goals. With most rates coming back down to historically low levels and a changing real estate environment, this may be the moment to strike.
Please don’t hesitate to reach out to me for a free consultation to discuss your mortgage options in this COVID-19-impacted market.