We’ve had some interesting developments that could (should) lead to an improvement in the mortgage markets:
- FHFA update to servicer advances on loans in forbearance
- Fed continues to decrease buying of MBS
- Minimal lender demand for High Balance loans
For up to date news and analysis of forbearance options, check out ForbearanceReport.com
Welcome back, it’s Josh Lewis with BuyWise Mortgage with the Coronavirus Mortgage Market Update for April 23rd, 2020.
Not a whole lot going on and a lot of it’s a little inside baseball, most consumers, even most real estate professionals won’t care about it. So we’re gonna try to frame it in a way that you understand why it’s important, how it’s gonna be impacting interest rates.
If you’ve been checking in the last week or two, we’ve been talking about spreads right now between 30-year fixed mortgages and the 10-year treasury are as high as they’ve been in years. I went back at least 10 years or more, about 30% higher than what we normally see.
So meaning, wherever the 10-year treasury is, we usually see 30-year fixed mortgage rates at about 1.7% higher than that. Right now, we’re almost 2.6%. So about 33% higher, actually a whole 50% higher, than where we would normally be.
So tonight, we’re gonna talk about some of the things that are causing that and some of the things that are coming down, right now, that should be helping correct some of that. So today, every Thursday, we get the weekly initial unemployment claims, and actually, let me make this a little bigger and me a little bit smaller.
The weekly initial unemployment claims, so we had only 4.4 million initial jobless claims. If we go back to the last normal week we had, before coronavirus, we had 282,000. So we’re still 16 to 18 times the normal average, but we can see it’s moderating here. So we were 6.8 million, the first week we had the big shutdown, we had a big jump to 3.3 million.
When almost every state shut down, it ran up to 6.8 million and then moderated to 6.6, 5.2, and now we’re at 4.4. And last week, we’ve finally had a tiny negative $8,000 revision. The revision the last few weeks have been upward. So on average, 5.8 million versus about 250,000 prior to that.
And remember, as the name implies, weekly initial unemployment claims, these are people who were employed, filing their first unemployment claim. And that’s what we’re seeing, people furloughed, people sent home, people’s companies shut down. So what we wanna start paying attention to is continuing claims.
So we’re going to buzz through some quick math ’cause everyone loves math, and go through what we’re looking at here. So the US labor force is approximately 164 million employees. So prior to the COVID outbreak, three and a half percent unemployment, meaning about 5.6 million people out of work, out of 164 million people in the labor force.
So if we add up the initial unemployment claims over the last six weeks, we’ve added 26.5 million initial unemployment claims. So that would tell us that the 5.6 million that we started with, plus 26 and a half million, gives us 32 million unemployed. And that would be, out of 164 million, a 20% unemployment rate.
Well, what I hinted at, two, three weeks back, is that at a certain point, we’re gonna hit an inflection point and we’re gonna wanna look at continuing claims. Continuing claims tells us how many people remain on unemployment and how long they have been there.
Now, there’s a little bit of a lag on the continuing claims versus the initial claims, but if we take the last number for the continuing claims plus the last two weeks, it shows that we’ve got about 25.6 million people out of work, not 26.5 million. So, why is that? Possibly the Paycheck Protection Program, if you’re not self-employed, if you’re not looking at a Paycheck Protection Plan loan, you may not understand what it is.
The government is basically saying, “We will loan small businesses two and a half times “their monthly payroll and we will forgive two months “of payroll going forward. “Payroll, rent or mortgage interest, and utilities.” So as an example, if that number came out to 65,000. Say there’s 30,000 monthly payroll. It’d be $75,000 loan they could get, if payroll continues, they keep their headcount the same, of 8 or 10 employees, the headcount doesn’t go down, that can be forgiven for the two months.
So you end up with a little bit of a loan, but a nice bit of forgiveness. So what that means is some employers are saying, “Hey, with this loan and this forgiveness “is a band-aid to get me through the next month or two, “until the economy picks up and people are back “out and about and supporting us, our business,” It means that employers are bringing some employees back, many employees back.
So that could be an issue of what we’re looking at there, we’ll know more over the next few weeks. So the next thing that could be good news for interest rates is good news for mortgage servicers. If you’ve been following, one of the big reasons why we’ve talked about mortgage rates being higher than they should be, while bond rates, including mortgage-backed securities, are at all-time low levels, is the rate sheet that we see every day, that you as a borrower are offered every day, includes a premium that’s paid for the mortgage servicing rights.
Well, due to the forbearance required as part of the CARES Act, high levels of unemployment, many people needing forbearance, we’re seeing 6% to 7% of the loans in the United States in forbearance. And what that does to servicers, we’ve talked about this, the servicers, depending on what type of loan it is, the person that you make your payment to, they don’t own the mortgage, but when you don’t make your payment.
When a borrower doesn’t make their payment, they are still on the hook to put at least the interest, if not the principle and interest, forward to the investor that owns the pool of mortgage-backed securities. So, what we saw this week is that the FHFA came out and said for Fannie and Freddie, they’re updating their policies to only require servicers to forward the interest payments for four months on loans in forbearance.
That’s still a lot. I could bore you with the numbers, but it’s a lot of money and it would be a significant hardship on servicers, ’cause we’re gonna have a lot of loans in forbearance for at least that four months. After that, they’re no longer required to make those payments. So what it does is, now, there’s at least some certainty.
There’s uncertainty in how many loans are gonna go in forbearance, how long they’re gonna stay in forbearance, but at least there’s some certainty on what the maximum potential loss is in that event. And just so you know, it’s not a permanent loss, they will get made whole on those at some point, but when you’re dealing with a fixed amount of operating capital and you’re seeing that dwindle really fast, that’s why they’re not paying for mortgage servicing rights at all, or at least on the level that we’ve seen in the past.
So it’s pushing interest rates a good bit higher. Now, you may be asking, “Okay, that’s great for Fannie Mae and Freddie Mac, “but what about the Ginnie Mae securities?” And Ginnie Mae securities, it comes as FHA, VA and USDA loans. Well, they had already set up something called the PTAP, the Pass-Through Assistance Program, that assists servicers unable to advance those payments.
So they have that requirement, servicers have that requirement on FHA and VA loans, but they can use that PTAP if it becomes an undue hardship on them and it’s going to significantly impair their liquidity, they can go and get some assistance from the government on that. So the only reason I mention that and why does it matter to a borrower, is that once the uncertainty and stress comes off of the servicers, they’re more likely to start paying up for servicing rights.
We also look back to the unemployment figures. When we see those going down, when we see continuing claims decreasing and we get unemployment back down at 10% and then hopefully at 8% and someday, back down to the 5% level, or below, that we were at, these are good things for servicers. It’s gonna relieve the stress that they’re under and going to allow them to normalize what they pay for the servicing rights and will improve our rate sheet.
So we’re not seeing much of it yet, but it is an inevitability, just a matter of how quickly it comes. So to put it in perspective here, we always like to look at the bond chart. We’re been going here for now, one, two, three, four, five, six, seven, eight, nine, 10, 15, about 20 trading days. So for about the last month, we’re almost exactly where we started, maybe a little bit higher.
We had a few down days early in the week, if you up days, the last few days. Essentially, we have a lot of fed buying, their supporting the market and keeping mortgage-backed security prices right there in this range, which is just below all-time highs in prices, which is all time lows in interest rates for you as a borrower.
So when we get that servicing piece under control, when lenders get their capacity issues under control, we will see interest rates start to improve. Now, if the economy as a whole is improving and we see treasuries going up, stock market going up, which it has for the last month, won’t get into that tonight, then maybe we don’t get them down to the level that they would be if we had a normal market right now with bond yields where they are, but we definitely expect that they will improve.
So let’s look for, today, what our mortgage rates are looking like. You saw the chart really flat for the last 20 days, for the standard balance loans, this chart and these numbers have been essentially flat for the last 20 trading days of the last month. Conventional rates right at 3.375%.
I did actually just this afternoon price loan for a gold-plated borrower, 800 credit scores 50% loan to value, not taking any cash out, just decreasing their interest rate and we were able to get them a three and a quarter with a quarter-point cost. So close to zero points at 3.25, but definitely a 3.375 for the best qualified borrowers.
If you have a lower credit score, at a higher loan-to-value, you might need the three and a half, maybe even a size 3.625, but it’s still gonna be an amazingly good interest rate. FHA and VA, both right around 2.875. Again, I have an investor for a really high credit score that’s at 2.75 at par, but for the most part, we’ve got four, five, six different lenders in that 2.875 range for FHA and VA.
So the fly in the ointment remains high balance loans, loans over 500 and 10,400, which are available in high cost areas like LA and Orange County, the Bay Area and other places around the country. So if you flash back to the Monday report, we’re a little bit better. Conventional at three and a half with a half point today versus one point that we were seeing on Monday.
Unfortunately, this swings wildly from day to day, it could be one point again tomorrow, it could be zero points at three and a half, I don’t know what that’s gonna look like. FHA at three and a half with zero points. I had a couple of investors on Monday at three and a quarter. Again, the market hasn’t moved. For whatever reason, their appetite for the servicing rights is what it looks like. And on VA, 3.75 with one point on the high balance stuff.
So it’s really important, our job is always, as a broker, we don’t have one set of rate sheets, we have 20 rate sheets and actually 150 that we shop, 28 lenders that we actually regularly work with. And in normal times, all we’re doing, since the guidelines are consistent from one lender to the next, normally, what we’re doing is saying, “Let me gather all the information from the borrower, “now, let me correspond that to the rate sheet “and which reputable lender has the best rates “in terms available for this borrower?”
Now, we have to do that and then we also have to say, “What are their temporary lock policies “in the current market, what overlays and additional rules “and regulations have they put on those loans “and then what are their turn times “under current capacity constraints?” So it’s great that we have those options, a direct lender only has one set of options, return times a handful of options for where to place that loan.
But it’s definitely an interesting market, interesting for borrowers to navigate, interesting for lenders to navigate. So hopefully you found this helpful, thank you for tuning in, we’ve made it through another week here and hopefully we’re another week closer to getting back to normalcy and getting back in our offices.
So stay safe, stay healthy, be good to each other and we will be back on Monday, hopefully with some more good news. Have a good night.