Mortgage Industry Faces Unprecedented Challenges, As Turmoil Swirls Amid Pandemic

The U.S. mortgage industry has been thrown into turmoil as the impact of the COVID-19 pandemic prompted millions of borrowers to fall behind on their payments.

At the end of the second quarter, according to the Mortgage Bankers Association, or MBA, the delinquency rate for loans on residential properties stood at 8.22%, up 386 basis points from the first quarter of 2020.

"The COVID-19 pandemic's effects on some homeowners' ability to make their mortgage payments could not be more apparent. The nearly [4%] jump in the [overall] delinquency rate was the biggest quarterly rise in the history of MBA's survey," said Marina Walsh, MBA's vice president of industry analysis. "The second quarter results also mark the highest overall delinquency rate in nine years."

By loan type, the total delinquency rate for conventional loans increased 352 basis points to 6.68%, the highest such rate since the third quarter of 2012. The Federal Housing Administration, or FHA, delinquency rate increased 596 basis points to 15.65% – the highest rate since the survey began in 1979.

Greg McBride, chief financial analyst at Bankrate, told International Business Times that delinquencies seen in the second quarter were a harbinger of what lies ahead.

“If the economic recovery languishes, unemployment remains high, and forbearance programs expire, delinquencies will remain at these elevated levels and defaults will surge,” he said. “A lot of the temporary layoffs in the second quarter are becoming, or will become, permanent layoffs the longer the virus drags on and saps demand.”

Holden Lewis, mortgage expert at NerdWallet, a personal finance company, said he thinks the trajectory of mortgage delinquencies will follow the course of the coronavirus pandemic itself.

“Where infections and business closures rise, mortgage delinquencies will follow weeks or months later,” he told IB Times.

FHA loans have been especially hit hard by delinquencies, McBride explained, because they have “lower qualification requirements and small down payments, which is not a good combination in an economic downturn.”

Lewis explained that with FHA loans, these borrowers typically have more trouble paying bills on time. “The average FHA borrower has a credit score under 700, while the average conventional borrower has a credit score over 750,” he said. “By definition, FHA borrowers make small down payments, so they start out with little equity, and they often spend most of their savings on the down payment and closing costs.”

But he added that the “vast majority” of FHA borrowers never end up in foreclosure, and the FHA gives them the opportunity to own a home.

The main reason that so many FHA loans are delinquent is because they’re predominately used by lower-income and minority households, explained Frank Gonzalez, a managing principal at MBAF, an accounting firm based in Miami.

“These are the sectors in our country that are the most severely impacted by the COVID virus and the downturn in the economy,” he told IB Times. “Although many of these borrowers are under forbearance and/or deferred payments with their lenders, it seems as though increasing requests for extensions of deferred payments are happening --which could lead to an increase in delinquencies.”

Adding to the chaos, the Federal Housing Finance Agency, or FHFA, recently slapped a widely criticized new 0.5% refinance mortgage fee that will become effective on Sept. 1

FHFA is the regulator of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).

In response to the criticism leveled at the fee by many sources, including the Trump White House, and calls to repeal the fee, Fannie Mae CEO Hugh Frater and Freddie Mac CEO David Brickman jointly wrote in a letter: “Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to ‘go up.' The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate.”

McBride said that refinancing rates are already up one-eighth to one-quarter of a percentage point since the fee was introduced.

“Ultimately the consumer will pay the fee but lenders were blindsided too and may end up eating the fee on loans that were otherwise locked and ready to close,” he said.

Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence, a research firm based in Dallas, told IB Times the refinancing penalty will crimp consumption at a time when households need latitude in their household budgets. “Refinancing has also been a major boon for lenders who will suffer the loss of that business flow at a delicate time and possibly need to cut staffing as a result,” she added. “It can be argued that lenders were pocketing too much profit by not letting mortgage rates fall to match the record decline in Treasury yields.”

She added that this move by Fannie and Freddie to try to “capture some of the extra spread being collected by lenders risks backfiring in the form of reduced volumes overall, which will ultimately slow the economy.”

Tom Forker, senior vice president and area market manager at Bryn Mawr Trust in Bryn Mawr, Pa., told IB Times the fee is “highly counterproductive to the stimulus efforts of Congress and the Federal Reserve Bank.” The fee has had “a substantial and immediate cost impact for both the consumer and the mortgage industry,” he added.

But Lewis said there are millions of people who could get significantly lower interest rates on their mortgages by refinancing.

“The new refinancing fee might deter a few thousand people, but it won't have a broad impact on the [refinance] boom,” he said. “Lots of people can refinance and save money – but now they'll save a little less money.”

Gonzalez, said the new fee will definitely deter borrowers from obtaining loans as it will make it more expensive, especially in times when there is so much uncertainty in the economy due to the COVID-19 virus and its effects.

“However, because rates are so low and the expectation is that rates will stay low for a while given the uncertain times, borrowers have the ability to obtain attractive financing,” he said. “In other words, take advantage.”

Gonzalez noted that Fannie Mae and Freddie Mac need the funding to be able to go private again and to be able to sustain any sort of drop in the market like the market did back in 2008.

“As the government moves towards releasing Fannie [Mae] and Freddie [Mac] as they were before the last financial crisis, the capital would be necessary to sustain themselves,” he added. “There is a possibility of both agencies doing a public offering.”

Gonzalez also speculated Fannie and Freddie could one day merge.

“It would definitely make them stronger and make the future of the housing financing system stronger,” he said. “The only hurdle is the question of would this create a larger monopoly?”

And yet there is a silver lining in this confounding scenario – interest rates are at record lows, spurring more homebuyers.

“Housing is one of the few economic positives right now, and in part due to record low mortgage rates,” McBride said. ”At least through the end of 2020 and the first quarter of 2021, housing will be a growth driver for the economy. As forbearance programs expire next year though, that could be a drag on the market.”

Forker said there is tremendous pent up demand in the housing market across the country.

“Combine that with metropolitan homeowners and renters moving out [of] those areas as the shift to ‘work from home’ grows and the need to live in the city is less stringent as the ties to the office vanish,” he said. “The result is a very vibrant purchase market which is mixed with a historic amount of refinance activity and will result in near record volumes for the mortgage industry in 2020 and into 2021.”

However, some 4 million mortgages are now in a forbearance program – and these will expire next year.

Gonzalez suggested that financial institutions will likely have to analyze these loans on a case-by- case basis and determine if the borrower has the ability to continue with the loan with additional forbearance relief or if the lender should proceed with foreclosure and/or legal actions because the buyer does not have the wherewithal, even with additional forbearance, to manage the loan.

Looking at the remainder of the year, McBride predicted that 2020 will be “a year to remember for all the wrong reasons but it will be a banner year in the mortgage industry due to record low rates and sky-high refinancing volume.”

But Booth said she thinks that home purchasers are buying into an “artificial housing market” as forbearance prevents the onset of the foreclosure cycle which would naturally act as a drag on home prices.

“It is likely today’s buyers will be upside down in their mortgages for years to come once lenders are allowed to begin foreclosing homes,” she cautioned.