Here is an update on the news about the upcoming mortgage crisis, how this works, and what it means for everyone watching.
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When you go and apply to get a home loan, you do what’s called a “RATE LOCK” on your mortgage. But, when you lock in a rate like this…the bank is agreeing to give YOU a promised rate, but the BANK doesn’t know what the ACTUAL rate is going to be at the time you actually close the loan. So, because the bank doesn’t want to lose money in the event interest rates change…they’ll hedge their investment but making the reverse bet of whatever YOU do. So, they do this by SHORTING Mortgage Backed Securities.
HOWEVER…when the FED steps in and says, “Don’t worry guys…we’re going to guarantee these loans, nothing to see here!” – it drives interest rates DOWN, causing the price of these mortgage backed securities to go UP – causing banks to lose a LOT of money on their hedged, short positions, betting that the prices of these investments would go down. So, banks go and put up more capital to offset those losses…that means, less money they can lend to consumers…and, from there, a problem arises when less money flows back into the economy to people like you and I. But then, there’s one more layer of complexity with this whole situation…somewhat on topic of what we talked about, but it’s another potential issue that I’ve been been seeing on multiple articles lately…and that’s missed mortgage payments. Part of the relief package includes potential mortgage payment forbearance of up to 180 days, with another possible extension of an additional 180 days beyond that.
HOWEVER…even though YOU aren’t making the payments on your mortgage, the mortgage servicer – or, the ones who handle and process those payments – are still on the hook for paying what you don’t. They’re obligated to keep the money flowing into those mortgage backed securities, the same ones which were bought by investors who want a safe and stable return on their money. And that poses another problem…if a significant amount of people hold off from paying their mortgage, how much will these loan servicers be out, and how long can they stay afloat during a time where they’re obligated to continue making payments? If you’re in a position to invest money, then – sure – you might be able to buy something at a lower price. And, if you’re SELLING your home, it could be slightly more difficult to get a high price, and a buyer who’s fully qualified to close on the loan. But, this is most likely going to affect smaller, more vulnerable banks in the short term than it is going to affect you and I directly.
Again, JUST MY OPINION HERE. And now – at the very least – I hope this provides some context and explanation for what’s been going on, so the next time you read a headline about the mortgage crisis – you have some background, and can stay better informed and kept up to date.
What Needs to Be Done Now
Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.
We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.
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