Many home builders are focused on merely surviving this economic Armageddon. Those looking beyond the immediate crisis tend to focus on modeling housing demand as the world returns to normal. While both of these are crucial subjects, the most fundamental piece of the housing recover model is not LESS DEMAND but rather what the mortgage market will look like when we begin to snap back from our pandemic malaise.
When discussing mortgage issues at new home forums, the experts tend to pontificate on "record low mortgage rates are likely to be here for some time." This comment is likely to be accurate and make the audience feel good. However, it is both simplistic and Pollyannaish.
The real issue related to mortgages is:
How many households that could get a mortgage two months ago will be able to get one six months from now?
Let's take a deeper dive into the issues that impact mortgage availability.
1. Mortgage underwriting standards are going up – The coronavirus relief law or CARES ACT is creating havoc on non-bank mortgage originators. Non-bank lenders account for just over 50% of all new home mortgages. These lenders rely on warehousing lines (short term facilities to hold loans) vs. banks that tend to hold closed loans on their balance sheet. Mortgages are then bundled up and sold to government agencies or third party lenders every few weeks.
The CARES Act allows for forbearance without consequence to the homeowner. This is quickly becoming a HUGE problem. Purchasers of mortgage securities have clauses that require sellers to repurchase non-preforming loans. If a customer closes a loan on day one and then asks forbearance on day two (without consequence), these loans will become non-performing mortgages that neither government agencies or other third party lenders will accept.
With no balance sheet in which to hold the loans, non-bank lenders could become frozen. The upshot is that most non-bank lenders are getting very squeamish that CARES can put them out of business. They are therefore increasing underwriting standards and documentation for their loans. Before you say, "Congress will fix this," keep in mind that some in congress never liked the idea of non-banks who have fewer regulations playing such an essential role in the mortgage markets. Also, banks have a very active lobbying effort and would love to see less competition in the mortgage space. The current impact is that lenders are increasing underwriting standards for all loans – even those guaranteed by the US Government entities such as Fannie Mae, Ginnie Mae, and Freddie Mac.
For those that say CARES Act is temporary and short term, history has shown us that when it comes to government, gumming up a system is far quicker and easier than cleaning up the mess once it occurs. Ultimately this will be fixed, although it may be months or years after the economy has started to rebound. Many in the industry think that the non-bank mortgage industry is in for a prolonged malaise.
2. Savings Are Going Down – 38% of all new home purchasers are first time home buyers. For these households, the number one obstacle in purchasing a new home is saving enough for a down payment. Only 1/3 of households age 30 – 39 have $20,000 in savings before the pandemic. With 20%+ Unemployment and millions more on reduced salaries or commissions, 1/3 of yesterday's buyers will not have sufficient savings to meet down payment requirements. Yes, families can help with down payments, and affluent households may see this as a once in a decade buyer's market, but entry-level homes will likely see a significant falloff in those who meet the down payment requirements.
3. Fewer Mortgage Options Going Forward – While government-backed mortgage products will be available (FHA, VA, USDA, Fannie Mae, and Freddie Mac), non-conventional loans will be tough to find given lenders' flight to safety. The largest non-conforming category is the jumbo market, which has already seen significant overlays (higher qualifying standard) and a general "run for the exits" by existing lenders. Other non-conforming products include high down payments for credit-challenged customers or households with large debt loads but lots of equity. These mortgages are likely to be a distant memory.
All of the above adds up to a concern that even as housing demand rebounds, the mortgage market may not allow for a quick recovery in home sales.
Cautionary Optimism – Given the above, keep in mind that:
(1) the new home market was in an extremely strong position before the pandemic. Inventories were at record lows, existing home inventories were at record lows, and we had an estimated 2,000,000 shortfall on total housing units relative to employment.
(2)The Fed, Treasury Department, HUD, and congress have been quick to plug holes in programs that created unanticipated consequences for industries. Also, remember that Secretary Mnuchin purchased California-based residential lender IndyMac during the financial crisis, so he understands the nuances of the mortgage business exceptionally well.
(3) Unfortunately, those hardest hit by this downturn are those that can least afford it – i.e. renters rather than homeowners and potential homebuyers. As a group, homeowners will weather the storm much better than other demographic groups and likely come out with the least amount of anxiety for a large purchase such as a home.