COVID-19 Causes Zillow to Pause Its Home Buying Program: Understanding How It Can Affect You

Online real estate service Zillow has a home buying program in 24 states. It stopped the program March 23, 2020 due to COVID-19. As the pandemic has continued, home buying and selling has been changed in every state, including ones with no “stay at home” or “shelter in place” orders.

In California, after initial disruption due to COVID-19, by the last week of March, real estate was added to the state’s “essential business operations.” This meant that home sales can continue, but precautions are advisable. A survey conducted by the California Association of Realtors in mid-March found that 54% of its members saw a decline in buyer interest. Some sellers have also backed out of their sales due to COVID-19, but the overwhelming majority were staying in the market.

California real estate pros are working virtually

The California Association of Realtors requested that all of its members should cease open houses shortly after Gov. Gavin Newsom announced that all Californians should stay at home starting March 19, 2020.

Before COVID-19, 75% of California’s realtors weren’t offering virtual tours or sales, but now they’re essential. Virtual closings are possible too, and are being used to continue the buying and selling process.

What does this mean for your home buying or selling?

Count on working with real estate professionals using technology. From virtual home tours to conducting the sales and negotiation process online, you can complete a real estate transaction without personal contact. Using virtual signing methods can eliminate the risk of virus contamination.

Interest rates are low and helping buyers and sellers

After the Federal Reserve lowered its interest rate to zero, interest rates increased for about a week. Real estate professionals found that trend hard to explain, but interest rates have adjusted and as of April 1, 2020, were lower than ever for all mortgage products, from 30-year fixed-rate loans to 15-year fixed rate home mortgages and 5/1 ARMs. Refinancing mortgage interest rates are also low, and experts predict that there will be many opportunities to refinance in the coming months.

California’s economic experts predict that with the $2 trillion Federal stimulus bill, the real estate market will not suffer much due to the COVID-19 crisis. The state’s economy is expected to recover quickly once the stimulus takes effect and people are back to work when the crisis is over.

Sources

Find Out Why Mortgage Interest Rates Are Higher Despite The FED Cutting The FED Funds Rate, and Despite The FED Injecting Billions Into The Financial System By Purchasing $250 Billion Mortgage-Backed Securities (MBS) Within The Last 2 Weeks. – $67B Last Week And $183B This Week Alone!

I wanted to share with all of you some detailed insights on this topic coming straight from a mentor and coach of mine, Barry Habib. Since over the last several weeks I have gotten a lot of phone calls, text messages, and emails from current clients, agents, contractors, referral partners, Zillow Mortgages clients, and others who have been saying

Fahad, we just refinanced or you just got a new purchase mortgage or refinanced one of our clients a couple months ago at X% and now the FED has cut the rates, why can’t we or our clients get a lower rate now?

For all those people and the many others still wondering or asking the same questions over what has been going on in the financial markets as it relates to mortgage financing and interest rates, I want to provide a copy of the article my mentor Barry Habib wrote yesterday March 26th 2020 along with Dan Habib. They so eloquently explain what is currently going on and why we are seeing the opposite effect of what we usually expect to see when the FED comes in and injects so much liquidity into the financial banking system.

We were already dealing with capacity issues before and now lenders are being hit with Margin Calls. I want to make sure I acknowledge and give credit to Barry Habib for his excellent guidance and mentorship I’ve been getting from him on a daily basis. His mentorship, coaching, and guidance has helped me in turn help tons of clients in making informed and calculated decisions when it comes to real estate and mortgage financing. Once again, thanks Barry for breaking all this down in a manner that’s easier for people to understand!

WASHINGTON, DC – FEBRUARY 12: Federal Reserve Board Chairman Jerome Powell testifies during a hearing on “The Semiannual Monetary Policy Report to the Congress,” in front of the Senate Banking, Housing and Urban Affairs Committee in the Dirksen Senate Office Building on February 12, 2020 in Washington, DC. (Photo by Sarah Silbiger/Getty Images)

The Coronavirus Meltdown

The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.

Here’s How the Mortgage Market Works

Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts.

The Servicer’s role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.

Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio.

 

Servicer Dilemma

As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio.

But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.

I’m From the Government and I’m Here to Help

In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility.

But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.

The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk.

Mark to Market

This week, due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a Lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.

Unintended Consequences

The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes.

If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.

Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper, the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.

But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset, on paper, by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls is staggering. They run in the tens of millions of dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.

Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different from mortgage rates, it prompted borrowers in the process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing.

It’s been said that the Stock market will do the most damage, to the most people, at the worst time.

Even Stephen King Could Not Have Scripted This

It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.

Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.

What Needs to Be Done Now

Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.

We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.

Resource Link
https://mbshighway.com/mortgage-crisis.html
https://www.cnbc.com/2020/03/29/mortgage-bankers-warn-fed-purchases-of-mortgages-unbalanced-market-forcing-margin-calls.html

Will the Corona Virus COVID-19 Crisis Affect Your Home Buying Plans?

Will the Corona Virus COVID-19 Crisis Affect Your Home Buying Plans? California Governor Newsom issues Lockdown Notice, Trump may issue National Lockdown. Learn How Virtual Selling and Open Houses Can Keep You Safe

In response to the COVID-19 coronavirus pandemic, California governor Gavin Newsom announced that as of March 19, 2020, all Californians should stay at home except for essential activities like shopping for food and going to the pharmacy. Open houses don’t fit the criteria of “essential activities,” so how is the real estate industry handling the COVID-19 crisis? 

Virtual open houses

Realtors have offered 360-degree virtual tours of homes for a long time, and now these services are more important than ever. You can continue looking for homes online and see everything without any need to leave your home. You can stay in touch with your realtor using online services as well. 

Some realtors are introducing video walk-throughs, which will help you to see homes in more detail than a virtual tour. Already popular, virtual tours and video walk-throughs are safe ways to continue your home search during the coronavirus emergency.

Real estate does not have to come to a halt

Across the U.S., developers are worried that the coronavirus pandemic will halt their projects. Only VA home mortgages saw a slight decline in interest rates when the Federal Reserve lowered the prime interest rate to zero in mid-March. Conventional and FHA home loans saw a slight increase in interest rates in 30-year fixed-rate mortgages, 15-year fixed rate home loans, and adjustable rate mortgages (ARMs)

Across the U.S., developers are worried that the coronavirus pandemic will halt their projects. Only VA home mortgages saw a slight decline in interest rates when the Federal Reserve lowered the prime interest rate to zero in mid-March. Conventional and FHA home loans saw a slight increase in interest rates in 30-year fixed-rate mortgages, 15-year fixed rate home loans, and adjustable rate mortgages (ARMs)

Deals are still going through, but new listings are slowing or coming to a halt. People still need to move for work or personal needs, but the majority of real estate experts are predicting that the usual spring housing market won’t be happening this year.

If you’re a home seller, you aren’t risking anything by leaving your home on the market while changing to virtual tours and walk-throughs. 

Closing deals is one of the main hurdles to continuing real estate transactions. With today’s technology, some closings can occur virtually/online, not requiring parties to the transaction to be in the same room. In California, virtual remote online notarization is still being considered by the state legislature, but COVID-19 makes this law much more of a priority.

You can still look for homes, apply for mortgage pre-approval, and consider listing your home for sale during the COVID-19 pandemic. This unprecedented crisis hasn’t stopped the real estate market, but it is likely to cause lasting changes.

Source

https://www.silive.com/coronavirus/2020/03/rapidly-shifting-real-estate-market-canceled-open-houses-virtual-tours.html
https://www.cnn.com/2020/03/19/success/real-estate-coronavirus/index.html