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March 23, 2020
The world we’re living in has changed dramatically, and keeps changing day by day. Keeping that in mind, I want to deliver the most relevant and practical advice and information I can to you right now, and will continue to do so as we all ride this crazy rollercoaster.
We are in uncharted territory. Many of the events of the past week were unprecedented, and there are sure to be more. So I want to talk to you about what is happening right now, and what I see happening in mortgage banking for the next 6 months based on where we are right now. Now more than ever, we cannot predict what happens next. But we can and will get through this together.
The week of March 16th-20th, we saw massive and unprecedented changes in our financial markets. The bond and stock markets crashed, and Mortgage Backed Securities (MBS) were not purchased by anyone. The result is that we now have a banking crisis.
Last week, many people who are in the midst of the home buying process heard that they could not lock in their rate. The mortgage market was moving too quickly for banks to be able to hedge and determine pricing. We saw that the mortgage bond market would be stable at opening because the government was buying the mortgage backed securities, and then as soon as those purchases were finished, that market would crash. There was no stability. As a result, many banks did not issue rate sheets, some limited refinancing.
I’m telling you this so that if you are either in the process, or about to purchase a home, you understand what mortgage companies are facing right now. I do believe the mortgage market will stabilize, and if you were able to lock in your rate last week, then great. And if you’re about to purchase, it’s going to be ok. Just be aware of what is going on, and be sure to have a candid discussion with your loan officer and realtor about what they are seeing, and what your best options are while rates fluctuate so rapidly. They may recommend “floating” your rate right now, which is actually what I am recommending to some of my current clients, depending on their circumstances.
It’s worth a deeper dive to understand why mortgages are affected just like the rest of the financial markets are right now. It has to do with liquidity. Banks have a limit to the number of loans that they can fund. They way they replenish that fund is through the sale of mortgage backed securities and of loans.
When mortgage rates dropped so dramatically, so many people wanted to refinance that it actually maxed out banks capacity to fulfill the lending demands. Without anyone purchasing MBSs (which is how they replenish their ability to lend more), the banks ran into a liquidity issue because they didn’t have the liquid funds to lend out.
So why are investors not buying the mortgage backed securities? Because in our current crisis, this pandemic is causing people to lose jobs and income. We’re seeing people go on furlough, and in general, there is nothing but uncertainty for so many. This gives investors the feeling that the likelihood of people defaulting on loans is much higher than in previous years.
Considering all of this, I think that in the short term, the government will end up purchasing all mortgage backed securities, much like they did back in 2008-2009. And I do think that will help to stabilize the market. And also, at this point, I actually feel fairly confident that the government will come up with a stimulus plan that will also help with that stability.
Even though this situation is evolving and changing daily, from what we’re seeing right now, it seems that the peak of this pandemic will affect the US this summer. That means that the income for so many, especially in the service industry, will be impacted for a long period of time. I don’t know how that will affect mortgage guidelines yet. As of right now, the rules have not changed. But I do anticipate that there will be new requirements for additional verifications of income and assets for people seeking home loans. I will keep you posted if and when that happens, but it’s a pretty safe bet looking into the foreseeable future. I also think that down payment assistance programs may not be available in the near future.
But it’s not all bad news. I do think that there are going to be a lot of late payment/forgiveness programs, and many states are already asking companies not to report late payments to credit bureaus.
I always tell people to not sell their homes in a time of panic. And that still absolutely holds true. If you still have your income, what is happening right now is no reason to sell. Truly.
However if you have lost your income and have no savings, considering selling your home is not a panic sale. Homes are investments, and if you need to cash your investment to survive, that’s what it’s there for. It’s important during times like these to weigh all of your options, and if cashing in on the home investment you made is going to get you through this, that’s ok.
I also want to point out something that I think helps with perspective- a recession DOES NOT equal crash in home value. We have had almost sixty recessions since this country was founded, and only two of them negatively impacted home values. Typically, during a recession a home is a stable investment because it is not subject to the same fluctuations of the market.
In fact, right now in Arizona we have had HUGE influx of people, and not enough homes on the market to keep up with the demand. So rents have gone up, and people are looking to buy.
So let me repeat, do not firesale your home if you don’t have to. If you are in a position where that is how you will financially survive, by all means, take refuge in your investment. But otherwise, sit tight and know that this too shall pass.
Ready for my new favorite analogy?? Try to be the oak tree in a hurricane. If your roots are deep in the earth, you may lose leaves and even a few branches. But after the storm passes, you’ll be ok. So how do we root? If you have not started budgeting already, there is quite literally no time like the present. Below are my SMART Steps for budgeting, and you can download my budget sheet for help (it’s free)
My husband Skyler and I actually started a facebook group for SMART Steps, and I want it to be a place where we can share more information like this, answer questions, and offer best advice possible during such difficult times. I hope you’ll join us there.
Stay safe, stay well. Focus on your loved ones, and keep hope. I know these are scary times, but we will all get through it together.
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