Home Finance in the time of the Corona Virus

Home Finance in the time of the Corona Virus:

The U.S. mortgage market is a service industry that has evolved into an efficient machine over the past fifty years. There are three distinct elements of that market: mortgage creation, mortgage packaging and sale, mortgage security investing and servicing. All three are separate markets, but all are totally dependent on the others.

Starting in March 2020, with the advent of the Covid-19 virus, significant disruptions in this chain began to occur. Mortgage originations for home sales came to a virtual halt, as home buyers opted to stay home rather than inspect homes for sale. Mortgage servicers started experiencing increased defaults in monthly payments, as some home owners were laid off from employment. Mortgage originators, anticipating further layoffs, started tightening loan approval requirements so as to insure only the best applicants were approved. Mortgage security investors, sensing problems in the future, moved their investment dollars to U.S. Treasures, resulting in less demand for mortgage securities ( and, thereby, an increase in yield requirements for the securities.)

A sense of panic in the mortgage market arose. The volume of new originations dropped significantly.

Then, on March 23, the Federal Reserve stepped in and said it would begin purchasing mortgage securities from originators and investors in massive amounts, thereby, providing unlimited liquidity to the market, and opening up favorable pricing for new mortgages.

It worked; since then, mortgage rates have been falling rapidly. Mortgage rates in the 2.5% range are offered by some lenders, although they require higher credit scores (640 FICO) and costs (points). It is anticipated that with further needed assistance from the federal government, these requirements will be reduced. In fact, there are some lenders that have already reduced credit score requirements and points.

The future: It is anticipated that federal efforts in the mortgage market will continue until the threat of the virus is removed, and the workforce returns to its jobs. In this period, rates should remain low with reasonable costs. Home seekers should prepare to get back in the market when it is safe. They should now be exploring their ability to get home financing at these favorable terms. Most lenders will issue prequalification letters, advising applicants of what they qualify for and at what rate.

Also, existing home owners should explore the benefits of refinancing their homes. The simplest refi is called a rate-and-term refinance, in which the mortgage balance remains the same and the interest rate is dropped. This can reduce your monthly mortgage payment by several hundred dollars per month.

Another refi, is a cash-out refi. This mortgage replaces your previous mortgage at a lower rate and provides cash to you. The maximum loan-to-value for the loan is 80% of the value of your home. This must be sufficient to pay off your existing mortgage, before providing cash to you.

Both of these refis have costs. Beside paying for a new appraisal ($550) and loan closing costs (2%-$%) of the home value, the mortgage may have financing fees (0 to 2.75%). It is usually recommended that the savings in monthly payments for a rate-and-term must be such that the loan costs are repaid in 24 months from savings. (For a cash out, personal needs are the determinant.)
(Note: for FHA, VA and USDA mortgages, rate and term refis, called a streamline refinance, which does not require an appraisal.)