As markets stabilize, a surge in missed payments may cause rates to swing

Here’s a look at the latest developments in the mortgage market for the week beginning 4/13/20.

• Rates have improved, but not for all loan types
• Surge in missed payments could mean more unpredictable rates
• Homebuying season is delayed, but a post-shutdown boom is expected

Rates have improved, but not for all loan types

We’re starting to see the flattening of a volatile rate environment, and rates for certain lower-risk loans have improved. This does not necessarily mean that rates for all types of loans will remain stable, however. Jumbo and non-conforming loans, which are not government guaranteed and present higher risk for lenders, still either have very high interest rates or are no longer being offered. In fact, the Mortgage Credit Availability Index, which measures the availability of mortgages, has decreased 37% for Jumbo loans since the start of the crisis compared to only 2.7% for conforming loans.

Even for typical mortgages, unpredictable factors like COVID-related volatility, and strain on servicers could easily cause rates to rise again. Given the level of uncertainty and continued skepticism by lenders, borrowers should be wary of timing the market, and instead lock a rate when it makes financial sense to do so.

Surge in missed payments could mean more unpredictable rates

Because so many homeowners are experiencing economic hardship, it’s predicted that the mortgage delinquency rate could hit 10% — nearing 2008 crisis levels. This is particularly worrying for servicers who are on the hook for payments to holders of Mortgage Backed Securities (MBS) whether they receive them from borrowers or not. Unlike delinquencies that occurred between 2008 and 2010, which came in successive waves, these missed payments are expected to hit all at once. This could overwhelm mortgage servicers, and potentially cause them to fail. With potential repayment issues leading servicers to slow down the purchase of servicing rights, the risk burden increasingly falls to lenders themselves. Because lenders manage large risks like this by adjusting rates and tightening credit standards, this could very well mean a return to unpredictable rates.

The Federal Reserve has not opted to support mortgage servicers yet, but Chairman Jerome Powell and Treasury Secretary Steven Mnuchin both indicated they are closely watching mortgage servicers in particular.

Other agencies, however, are stepping up to ease the burden on servicers. Ginnie Mae has announced it will lend to servicers for any loans it backs — specifically government loans such as FHA and VA loans. Although Ginnie Mae backed loans only make up 4.25% of MBS, they often have higher risk of delinquency due to lower credit and down payment requirements.

Homebuying season is delayed, but a post-shutdown boom is expected

Coronavirus lockdowns have all but stopped purchase activity. Real estate experts say the spring market is not going to see much activity at all, but believe pent up demand will drive a huge late summer market. While activity is expected to pick up, the effect on home prices is yet to be determined. Homes coming off the market now have driven prices up a bit, but increased supply and demand could change that post-lockdown.

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