Welcome back everybody, it’s Josh Lewis with BuyWise Mortgage. So actually, a pretty mellow update tonight. I have a number of updates, just interesting things happening in the mortgage business.
For the most part, everything’s pretty even keel, but every day jumping up and looking in the inbox and seeing what’s coming up and what’s new and what the actions and reactions are in the mortgage markets has been interesting.
That’s what we’re here for, to share that info with you, so let’s jump in. First thing let’s get me back over here smaller and our information a little bit bigger. So like I said, in the news, or at least in my inbox, I don’t know if that’s news, but industry stuff showing up here.
First one, a couple of interesting things today. More loan programs suspended. Both of these are supposedly temporary. You’ll notice these are specific investors, so these are not industry-wide.
I don’t want anyone thinking, hey, there’s no HELOCs or there’s no cash out with Fannie and Freddie. TCF is a bank that does wholesale home equity lines of credit. Nearly every lender, I would say 80% plus, if they don’t offer their own HELOC, they offer TCF HELOCs.
Reading between the lines, the reason why TCF pulled back from this, if you go back and you flashback to 2008, HELOCs were some of the worst-performing loans, some of the biggest losses for banks, and everyone rapidly got out of that market and took a long time for them to come back in, and they were much, much more conservative.
That’s not what’s happening right now. I believe this is largely due to an influx of many large loans that TCF just was not interested in taking on. What do I mean when I say that? Jumbo market largely disappeared. High-balance loans, we’ve talked about extensively on here, have been at really high-interest rates, relative to what they typically look like. So what were people doing?
They were doing standard balance, firsts up to 510,400 with big TCF HELOCs behind there, and I just don’t think they wanted that much concentrated risk of bringing on at this time that many potential new loans, especially big ones.
So that’s their deal. Carrington Mortgage Servicing, big servicer nationwide, specialize. They don’t really, Fannie and Freddie’s not really their thing. They’re good at really low-credit score government loans. Shouldn’t say they’re good. They get them done and they have really good terms.
Anyone operating in that space, they’re difficult loans. It’s hard to be efficient. Not one of my favorite lenders, but they definitely serve a purpose, and they help a lot of people on the lower end of the credit spectrum.
We talked about last week Fannie and Freddie passed some new guidance of what they’re going to do in terms of helping servicers with loans that potentially go into forbearance. They left the cash out loans sort of out of that guidance.
For the time being, Carrington, who’s probably not doing a lot of Fannie Freddie stuff to begin with, just said, you know what, we’re gonna sidestep that market. So once we get past the forbearance stuff, no doubt that Carrington will be back in play there with cash out Fannie Freddie loans.
Once we get a little bit better pricing on high balance and get a little clarity on forbearance and how many people are not making their payments, TCF will come back into that market. It could be six, eight, 10 months. Hopefully not. Hopefully in 90 days or so we have them back.
It’s a good option for a subset of borrowers. This was a big headline today. Fannie and Freddie felt the need to come out and talk about the fact that borrowers in forbearance will not be required to bring loans current with a single lump-sum payment.
There was a ton of misinformation. For whatever reason now, everyone has a microphone, like this guy and a camera, and wants to jump in front of it and talk the loudest about what is the biggest potential for disaster.
So had a lot of loan officers, a lot of realtors, moreso loan officers, talking about, hey, don’t take forbearance because at the end of the 90 days, you’re gonna be required to pay it all back in one lump sum.
When you can’t do that, you might lose your home. Because of that mass misinformation, Fannie and Freddie felt the need to come out today and state that borrowers in forbearance will not be required to bring it current in one lump sum.
That is always an option. If someone chooses forbearance to preserve their liquid cash, they get 90, 120 days into it, and remember, the CARES Act offers forbearance for up to 180 days, and it may end up getting extended, being longer than that.
But let’s say you get 120, 180 days down, and you’re taking advantage of the forbearance, of making a less than full payment or no payment, and you choose to bring it current, obviously, you can do that. Most people wouldn’t be in forbearance if they had that ability.
Fannie and Freddie did a good thing coming out and just providing some clarity to that situation, saying, obviously, there’s a couple of options. One is the type of modification that will increase the payment slightly over a period of time.
One is a permanent modification that can tack it on to the end of the loan. There’s going to be options for folks that need the help of forbearance, and they’re not gonna be required to bring it current all at once or potentially lose their home.
That clarity was helpful. The last one, not really a shocker. Last week ended on the 24th, so Friday is the 24th. We’re getting really close here to the beginning of the month of people being required to make their May payments, or more importantly, being late on their April payments.
So, we had a ton of people jump into forbearance agreements last week, and I would expect it’s gonna be a big number this week, as we know most people procrastinate and/or are just hoping there’s gonna be an option, something present itself that they’ll be able to avoid forbearance, and as we get here towards the end of the month, I expect those numbers to jump.
Let’s look, jumping way ahead, let’s look at those forbearance numbers. These are truly astounding. The reason I wanted to show it in the form of this chart, the blue line is Ginnie Mae loans, that’s FHA and VA. The orange line is Fannie Freddie.
The gray is basically all other types of loans, and the yellow is the entire market. If we look back here, Fannie Freddie, FHA, VA, all under 0.2% in forbearance. There was a tiny subset of people that were in forbearance agreements, and I would be willing to bet that the vast majority of those are still in some type of forbearance agreement from the last downturn.
What we saw really rapidly, March 9th is when everything kind of hit the fan here in the US and people were realizing, hey, this isn’t a China problem, this is a world problem. March 15th, again, everyone’s kind of in a panic, people starting to work from home.
Around March 22 is when people were realizing, hey, I have an April payment due here soon, and I don’t have the ability to pay it, and the government is telling holders of federally-backed mortgages they need to offer me forbearance. So when we get to the end of the month, it’s been pretty much a steady climb.
Right now, this blue line is the crazy one up here, almost 10% of all FHA and VA loans, so one out of 10 FHA and VA loans are currently in a forbearance agreement. The Fannie Freddie stuff is performing better, down at 5.46%, and the overall market is about 7%.
One of 12, is it less than that? It’s one out of, 7% puts it about one out of 15. A little bit less than one of the 15 loans in forbearance. I really wanted to go through this before we jump into the next slide so you can see.
Remember why we talk about for the 90% of people, the 93% of people who are not in a forbearance agreement and might be in the mortgage market either to refinance, take advantage of the current low interest rates or to potentially buy a property, this is impacting them.
Because as we’ve said, servicers, depending on whether it’s an FHA, VA, or Ginnie Mae loan, the servicer, the people you make your payment to every month, are required to make those payments, at least the interest, whether you make that payment or not.
And when we’re talking about billions of dollars of loans, it adds up to real money. The sort of simple back of the napkin number is that with just the potential forbearance loss, which it’s not a loss, it’s a cost that should be recouped in and make them whole at some point in time, but in four months the industry would lose more money in principle and interest advances than they make in an entire year.
It’s a liquidity problem where servicers don’t have money to take on that risk, and therefore, it’s getting passed on in different ways to borrowers in the primary market. Let’s take a look at that. What I like to call is it’s a forbearance premium.
What we have right now, interest rates that are higher than they should be, it’s a premium due to the forbearance risk to servicers and owners of those loans. For the first couple weeks of this crisis, when lenders were overburdened with all of the refinance volume from February and early March and were sending people to work from home, a lot of that was just capacity.
Lenders were offering terrible rates ’cause they had more loans than they knew what to do with. To a degree, that’s worked its way through the system. We’re not seeing a capacity premium, but we’re definitely seeing this forbearance premium, and it’s going to last a lot longer than what that volume premium had.
Let’s try to answer this question. How long are we going to have that in the market?
If you’ve been following these reports, you’ve seen, when I show you the high-balance stuff, when I show you the VA and FHA loans, what you just saw with a 10% default rate, there’s a reason why those are performing, or those loans are priced so much worse than other loans and worse to the market of where the underlying bonds are being sold.
Let’s take a look at this. The orange line here is actual real data. I showed last week a chart that shows the spread between 10-year treasuries and then where 30-year fixed mortgages are in the market. This chart looks a lot like that. It’s a different measure.
It’s not the 10-year, it’s the spread between the current mortgage coupon that most Fannie Freddie loans are being sold at and then the actual rate sheet number here. You can see that basically from 2011, 2012, 2013, we had a really low spread, and then we’ve been super consistent here from 2013 all the way through 2020.
The 10-year treasury spread to mortgage rates, that number was 1.7 really consistently for almost 10 years, 1.7%. Currently, we have a ten-year treasury at 0.65%. Tells us 30-year fixed rates historically for the last 10 years would be about 2.35%.
We’re about a full percent higher than that, and that’s what this spike in this orange line represents. The yellow, the white, orange, apparently I’m colorblind tonight. The white, red, and green lines are this gentleman’s best prediction of what we’re looking at before this normalizes and goes away.
This isn’t just a guess, this is largely based off of what is going on with the coronavirus right now. How long is it likely to be with us? The peak up here at the top, were not likely to get any worse than this because servicers have a pretty good handle on what the worst of their potential liquidity issues are.
We should be getting better here. Now the question is this white line says, hey, from here through the beginning of 2021, that indicates that things just keep getting better. We’re seeing states starting to open up. We don’t know how that’s gonna look.
Most importantly, we don’t know if we’re gonna see spikes in people coming down with the virus when everyone is released out of self-isolation here.
If everything works, and it just trends down, the virus, we sort of get the herd immunity that everyone’s been talking about, we see the spread decrease, then we would see this green line that through the end of 2022, this gentleman expects that we would get back down into these normal ranges.
Now if people get released, and we see this line trending down, but then we have a spike in cases, see the hospitals starting to get overwhelmed, see people having to be sent back home, the big issue there is not hospitals getting overwhelmed for mortgages, the big issue is if we see that, everyone’s gonna be back in isolation, and that is gonna get people off their jobs and back in forbearance.
We would, in that situation, could see a spike back up in this premium. My guess is it will not be a straight line down. You can see these little S-curves here. We’re gonna see some S-curves down, and it’s probably gonna be two years before we get back down to that 1.7% spread.
That’s why, if you’ve been listening, I tell anyone who’s in the market right now for a refinance, a purchase it is what it is. If you’re gonna purchase, you’re gonna take the current rates. But if you’re looking to refinance, you already have a current loan and were saying, hey, do I take what’s in the current market, or do I think it’s going to get better further down the line?
For a million reasons, and maybe in the future we’ll do a call here where we go through why everything that’s going on is deflationary and why it will lead to lower rates, but the expectation is definitely that mortgage-backed securities and treasury rates will stay low, if not going lower still.
We just have to get this forbearance premium out of the market. It’s gonna be a year or two before that happens. What we’re advising clients is if the numbers make sense today, do the loan and do it as close to low or no-cost as possible.
Because there’s a significant probability or possibility that rates are gonna be better going forward, and we want to be in a position to benefit from those if we can. With that being said, let’s just wrap up with where the market is at right now.
Again, the Fed is doing a lot of buying here in mortgages, so they’re tapering it down. At the peak here, when they first started all this buying, they were buying 25, 30 thirty billion dollars of mortgage-backed securities on a daily basis. Now, we’re down to about seven billion today. Still massive buying but less than 25% of what it was.
But most importantly, they’re just controlling the mortgage bonds what they’re selling for here. That line, that red line of resistance, that’s basically the best pricing and lowest yields, or lowest rates of mortgage bonds ever. Now we’re going on five weeks of trade in here where we’re right in this range.
You can see hiding behind our logo there’s 11 basis points we were off worse, so when you see that red 11, that’s generally a bad thing, not much of a bad thing. It doesn’t matter, we’ll get a day or two of red ones, and then we’ll get a day or two of green ones.
For the foreseeable future, we’re going to be in this range. So what does it mean when we actually look at rate sheets? Again, the standard balance loans are gonna be the most aggressive, 3.375. If you were spectacularly well-qualified, 800 credit score and borrowing 40, 50% of the value of your home, you might be able to do three and a quarter at zero points.
FHA is still right in there at 2.875. VA, a little bit worse. On Friday, that was at 2.875 as well. It’s odd since these both go into Ginnie Mae pools that we’re seeing a little bit of decoupling where they’re not exactly moving directly together.
Then, forgive me for not updating my slide here. It’s not for 4/23, that’s for 4/27, today. Let’s look at the high-balance stuff. We are seeing things get better. This conventional at 3.75 was zero points. Last week, the best we were looking at was 3.625 with like a half percent cost, so we are getting back to, for your best well-qualified borrowers, we can do a zero-point loan on the conventional high-balance stuff.
That’s gonna enable us to get a bunch of borrowers into the market and taking advantage of the current interest rates. The FHA stuff, still not great. We’re at a half percent premium. We can at least still do that with zero points, so 3.375 with zero.
My biggest worry with that is we only have one lender that’s priced that way. The rest of them are all at about one point. That lender is a massive servicer of Ginnie-backed loans, so FHA and VA, so they’re offering really, really good pricing on that because they can hold the servicing and feel like they have the liquidity to deal with the losses.
The last one there, VA, it’s the worst of the bunch, 3.625 with one point. That number’s crazy. 10 days two weeks into this crisis, I locked a VA high-balance at 3.25 with a one-point lender credit. We’re not in that much of worse of a position that VA should look like that, so I don’t really have any guidance or advice, if you’re in that market and looking for a high-balance VA loan, and when it’s gonna come back.
But I do expect when the forbearance figures start improving when we get people back to work and they’re making their mortgage payments, the FHA VA stuff is going to normalize, hopefully, the high balance stuff continues to normalize.
If you have a specific situation, a specific question, definitely jump into the comments here. I see our good friend, Jeb Smith, one of our best realtor partners has chimed in here with good stuff.
If you guys are following him on Facebook or on his YouTube channel, a lot of good information on the forbearance stuff and what’s going on in the real estate markets.
Jeb and I, either Friday night or Saturday of this week, are gonna do an extended, probably 20, 30 minute conversation on where home values are, what’s happening with home values today, what’s likely to happen in the next 90 days or so, and what we’re gonna see over the next one to two years.
We have a lot of people asking those questions, especially our first-time buyers, the millennial first-time buyers, who remember their parents having issues and losing homes during their childhood and teenage years and want to get into the market themselves and absolutely positively do not want to get on the wrong side of it where they buy at a peak.
So it’s important information. I’ll give you a brief teaser. I don’t think we’re anywhere near a bubble and seeing home values decrease, but opinions, everyone knows what those are like, so tune in.
Watch Jeb and me on his YouTube channel Friday, and we’ll go deep dive into the details on why home values, while they can possibly take a dip here in the next six months, we’re gonna see home values higher over the next year or two than where they are right now.
Again, appreciate everyone tuning in. Hope you found the information helpful, and we will see you back Thursday night. All right, have a good one.