How mortgages practice social distancing

 Loan Guidelines  Comments Off on How mortgages practice social distancing
Mar 272020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The realities of social distancing and shelter-in-place orders are impacting the real estate industry.  For those who are trying to buy or refinance a home, those realities could impact your ability to close your loan.  The Federal Housing Finance Agency (FHFA) has taken notice and in response has instructed Fannie Mae and Freddie Mac to ease some of its loan guidelines in two areas.

With respect to appraisals, the FHFA recognized that a standard appraisal in which the appraiser visits and inspects the home is not consistent with virus containment measures.  Instead, Fannie and Freddie have agreed to accept appraisal alternatives with some conditions. For most purchase transactions, if the lender uses what’s called a desktop appraisal – for which the appraiser relies on public records, multiple listing service information, and other third-party data sources to identify the property characteristics – and the estimated value is within limits established by Fannie and Freddie, the lender won’t be held accountable for the value, which means the lender should be willing to close your loan.

With respect to employment, the FHFA recognized that many employers are either shut down or their employees are working remotely.  The traditional verification of employment the lender performs before closing may not be possible. The new guidance allows lenders to accept an email from the borrower’s employer or evidence the employee is still on payroll – such as a recent pay stub or bank statement showing direct deposit of a payroll check.

While these accommodations are great, it’s up to individual lenders to agree to use them.  As lenders still bear some responsibility for loans that default, and given the current economic situation, you may find that your lender isn’t willing to take the risk.

Rate update: It’s the government’s fault

 Interest Rates, Residential Mortgage  Comments Off on Rate update: It’s the government’s fault
Mar 262020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Quite simply, mortgage rates are all over the place right now, and the market is a mess.  Despite conspiracy theories you may be reading on social media, the government isn’t keeping rates artificially high to help Wall Street make a fat profit.  In fact, it’s because of government involvement that rates are as low as they are.

Let’s take a short look back.  It was only about 20 days ago that mortgage rates hit all time lows.  Those lows lasted all of a couple hours one morning – and then rates started moving quickly higher.  I discussed in my last blog some of the reasons that happened. In the simplest sense, it was due to basic economics.  There were a LOT of mortgage bonds to sell due to the record low rates, and there were very few buyers of those bonds due to market turmoil surrounding the coronavirus.  In order to clear the market, mortgage rates shot up over 5% in short order.

Since then, rates have been extremely volatile, falling back below 4% some days, then jumping back above 5%.  But I said the government has been keeping rates low. How does that jive with the volatility?

Well, this weekend, the Federal Reserve basically wrote a blank check – indicating it would purchase an almost unlimited amount of mortgage bonds to restore liquidity to the market.  That means markets can trade on the certainty that there will be a buyer for mortgage bonds. Now, that doesn’t guarantee low rates because the Fed is not setting the rates of the mortgages it buys.  Instead, it allows the market to set rates knowing there will be a buyer.

The desired result – which I think we’re beginning to see – is more restrained volatility.  Thirty-year rates were back below 4% the last couple days for most lenders, and despite continued volatility, have remained there.

Rate update: Why mortgage rates aren’t still at record lows

 Interest Rates, Residential Mortgage  2 Responses »
Mar 162020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Over the weekend, the Federal Reserve cut the federal funds rate to zero, and it seems the whole world is asking today, “Where can I get that free money?”  And, unfortunately, you can’t. The reasons are a little complex, but let’s see if we can break it down a little.

First, you have to realize that the federal funds rate, and in fact all the rates the Fed directly sets, are very short-term rates.  Mortgage rates are long-term rates. They respond to different factors, and often move higher when the Fed rates are moving lower.

So, mortgage rates have been on a wild ride the last couple weeks with rates falling to record lows, then bouncing 25% higher in just one week.  The reason they fell so quickly is the same as the reason the Fed acted this weekend: the pandemic is slowing our economy. But it looks like the virus is going to be with us for a while, so why didn’t rates remain at record lows?  Let’s analyze the causes and predict what will happen over the coming weeks.

Mortgage rates are a reflection of the price investors are willing to pay for mortgage-backed securities – basically, your mortgage bundled with a bunch of others as an investment.  That price is influenced by a number of factors. We discuss some of those factors regularly, such as expectations for economic growth and expectations of inflation. It’s economic growth expectations that caused rates to plummet a couple weeks ago.

But we had other negative factors come into play last week.

  • – One of those factors we call runoff.  As we’ve discussed before, investors buy mortgage bonds expecting to earn interest over a number of years.  When mortgages pay off early, such as through refinance, investors actually may lose money. In response, investors lower the price they’re willing to pay for mortgage securities, which results in higher rates.
  • – A second factor is basic economics:  supply and demand. The drop in rates generated an enormous number of mortgage applications.  We didn’t have enough investors to absorb all that supply. On top of that, investors didn’t seem to be the mood to buy much of anything last week as prices dropped in most markets.
  • – Finally, lenders’ systems were overwhelmed with the volume of new applications, and many of them raised their rates as a means of throttling that volume.

So, what’s next?  While the federal funds rate announcement isn’t going to lead to lower rates, one of the Fed’s other actions may.  The Fed is stepping into the market to buy a small amount of mortgage-backed securities. It appears this is returning liquidity to the market as rates have dropped a little today.

It probably will take a few weeks to dissipate the other negative factors, but I suspect the positive factors, slowing economy and negligible inflation, will still be in place.  And once that happens, we could see record low mortgage rates again.