On the surface, it may seem like paying cash for your new home is the better option. But, with low rate mortgages available and your other financial obligations, is it wise to fork up all your cash.
Summary: People contemplating a home purchase do so while mortgage delinquencies keep rising. Under policies established by the government in response to COVID-19, borrowers have six months or more to delay payments. This affects how much money banks lend and, soon enough, how many houses are on the market.
The Mortgage Bankers Association (MBA) recently announced that the delinquency rate on 1-4 unit residential properties increased to 4.36 percent of all loans. In April alone, the number of overdue mortgages rose to 3.6 million, which is sharply up from about two-million in March.
Some of this is to be expected, of course, as the COVID-19 economic slowdown has forced so many out of work. The subsequent enactment of Coronavirus Aid, Relief and Economic Security (CARES) legislation encouraged lenders to afford mortgage forbearance to those displaced by the pandemic restrictions. What do so many postponed loans on the books mean for people currently shopping for their ideal house?
Forbearance and Delinquency
The CARES Act, as indicated, promotes mortgage forbearance by lenders and servicers in every state. Every mortgage backed by the federal government qualifies for this pause or reduction in payments for six months or more. Interest still accumulates during this period, so the entire amount owed does not diminish due to forbearance. It is simply pushed off while hard times last.
These measures stave off the usual response to non-payment, including adverse credit reporting and legal action to seize the property. However, such arrangements do not move the loans out of the delinquent column in terms of MBA reporting; rather, they spare distressed borrowers the bitter fruit of delinquency.
On a comparative basis, owners in Washington behind on mortgage payments represent a very low percentage against the national figures. This does not, nevertheless, give the complete picture.
According to the Seattle Times on May 1st, “The number of mortgage-holders who have negotiated forbearance agreements with their lenders to postpone mortgage payments also is on the rise, according to Black Knight (a mortgage data reporting outlet). As of April 30, 3.85 million homeowners were in forbearance, representing a combined $841 billion in unpaid principal and 7.3% of all active mortgages — a threefold increase from a month ago.” This may or may not affect future lending criteria.
Oregon’s April delinquency rate, 4.05 percent, was nearly twice as high as last year at the same time. While reaching not nearly as high as its 2010 record of 9.2 percent in the aftermath of the financial crisis, the jump illustrates the severity of the toll COVID-19 exacts on the Beaver State. Granted, non-payments and late payments tend to rise as the mid-year point approaches.
Yet with unemployment soaring to over 14 percent, it is hard not to attribute the increased delinquencies to decreased income due to the coronavirus. Many figures indicate a slight drop in the out-of-work population, so mortgage servicers will stay tuned.
Idaho distinguishes itself as having the lowest delinquency rate in the United States. At 3.53 percent, the Gem State has not suffered to the same degree as her sisters between the seas. That said, the defaults are still over 65 percent higher than the prior year. Unemployment applications almost quadrupled in April over March, though they decreased noticeably in May.
What, then, is the outlook for Idaho? The state’s Division of Financial management is not hopeful, forecasting a return to pre-pandemic economic conditions by 2022. Forbearance grants will not likely extend that far out. The open question is whether real estate will be available for Idaho’s many home seekers.
Like other Rocky Mountain and Pacific Northwest states, Colorado’s delinquency rate, 2.46 percent, stands in stark relief against national numbers. Even more interesting, the Denver Post reports that a third of forbearance petitioners apply as a contingency, while continuing to make regular monthly payments.
Like other states, though, Colorado saw a marked increase in unemployed individuals in March and April, perhaps foreshadowing a change in that proportion. With more mortgagors requesting, and more lenders granting, time-outs on remittance schedules, the concern over liquidity arises, especially as purchasing activity picks up.
Is There Money to Lend?
Liquidity refers to how much cash banks have on hand to lend. As forbearance cases increase, ready cash necessarily decreases because income is reduced. True, it is owed and expected, eventually. Forbearance amounts to essentially an IOU from customer to lender. A problem arises because so many lenders sell their loans to the secondary market (Fannie Mae, Freddie Mac or other investors).
The servicing of the loans is also farmed out; the assigned servicers are then mandated to pass the collected monies (minus their fees) to the investment entities. When servicers see a dramatic drop-off in receipts, they are still nonetheless on the hook with the investors.
This situation is not sustainable because Freddie, Fannie, Ginnie Mae and other secondary market titans will not continue to purchase mortgages from which there is no profit. What follows could be a tightening of credit guidelines and reduction in lending nationwide. Even government-backed investors are not inexhaustible sources of funds. All kinds of political activity is in the works to prevent such a scenario but little is resolved as of now. This raises a legitimate question if you want to buy your dream home this year, will financing be available to do it?
One way out that is still under exploration is that the Federal Reserve System would make direct loans to secondary market institutions while the U.S. Treasury advances additional capital to insure against losses. Clearly this is a short-term solution that is limited in duration.
Nevertheless, it can help to keep the money supply available to investors, and the lenders they buy from, for the coming year. Prospective buyers do well to monitor business news closely in order to determine the right time to proceed with buying a home.
Allowing for all the uncertainty over liquidity, none of the worst-case scenarios have come to pass as of yet. At present, interest rates are low and economies are expanding, albeit very slowly. For those with income unaffected by COVID-19, creditworthy and financially secure, there might never be a better time to make the move and put in an offer. In any event, given the times, it can not hurt to submit a mortgage application that is strong on all fronts, credit, employment, assets, home value etc.
Will Delinquencies Lead to More Listings?
Forbearance is ordinarily good for six months and eligible for an additional six-month extension. It is not reasonable, however, to assume there will be additional extensions. There will come a time when lenders will either have to seize their assets or go out of business.
As that day approaches, what decisions will distressed homeowners make? If still out of work due to coronavirus, some will face the inevitable and put their properties up for sale. With tight inventories now, some seekers may wait to see if this is the case. With a larger pool of available homes, competition in lower and negotiation momentum can shift in a purchaser’s favor.
Another possibility is that foreclosures resume, there is now a moratorium under CARES, and a large number of properties will become bank-owned. There are deals to be made in this particular category that can save a buyer significant cash. Yes, there is a sadness to acquiring a home taken from another, but buyers are not the evicting party in such cases. A desirable home at the right price and legally obtained does not reflect poorly on the purchaser.
How a Mortgage Lender Can Help
Lender representatives are not financial advisors but they can speak for their own institutions. How they evaluate customers and what institutions they sell to are pertinent and timely questions. Speak to one today to see if now is the time to finance a new home.
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