What does a marketer market if their financial institution isn’t all that anxious to make loans? That’s a question to ponder when looking at home lending these days.
The outlook for the mortgage lending business isn’t one thing, but a group of things, all connected and yet somewhat distinct. Each of them — demand for new mortgages, home sales and home prices, performance of existing mortgages, demand for refinancings and lender willingness to make them — is occurring in the context of an economy that not even mortgage lending veterans have seen before. Neither have homeowners nor would-be homeowners.
There is strong potential for things to become very ugly before they get better. Just what ugly will look like, and how ugly things get, remain to be seen. The point has been made frequently that while the financial crisis and the Great Recession crept up gradually in some ways, the COVID-19 Recession, or whatever you want to call it, came down like a ton of bricks. It’s quite possible a major wave of foreclosures will come down the road. It will be delayed by federal legislation and state-level moratoria on foreclosures, but in time mortgages must be paid or the gavel falls.
Employment Is the Fulcrum All Else Pivots On
The central shared point for everything in this context is the employment picture, which grows worse in raw numbers as the COVID-19 economy goes on. Beyond this, as noted in reports by the Wall Street Journal and other sources, unemployment originally expected to be temporary, in the form of furloughs and layoffs, is shaping up to be permanent in an increasing number of cases. Both major employers and Main Street employers have been clobbered. Some have shut their doors, others have shut factories and stores, others have had to extend the time they are closed indefinitely.
Institutions making decisions on anything to do with mortgage lending in today’s environment have to remain cautious.
“We’re in a week-by-week cycle, in terms of the relevance of data and in terms of COVID-19 impact,” says Joe Mellman, SVP and Mortgage Business Leader at TransUnion.
Mortgage planners can also suffer from focusing too much on any one part of the business, according to Craig Martin, Managing Director of the Wealth and Lending Group at J.D. Power. “A lot of people are getting distracted by the servicing side,” points out Martin. “Yet mortgage lenders aren’t hurting for new business.” Indeed, what may hold things back are some large lenders’ own policies as they attempt to navigate confusing and sometimes contradictory federal rules post-COVID outbreak, according to the Wall Street Journal.
With so much in flux, bank and credit union executives need to be certain that they are seeing every data point in the right perspective.
Looking at Mortgage Loan Forbearance
While it may feel like an eternity, it was only about three months ago that it began to become apparent that the coronavirus and the economic impact of the lockdown and stay-at-home strategies would be more than a blip. Banks and credit unions began offering skip-a-pay for consumer loans and began to address forbearance on mortgage loans. The CARES Act, Fannie Mae and Freddie Mac and other government-sponsored enterprises, and mortgage regulators also addressed forbearance. The CARES Act can allow a borrower with a federally backed mortgage to request up to two 180-day forbearance periods, during which all normal interest and fees accrue.
All of these efforts, private and governmental, provided some immediate relief from anxiety as a booming economy virtually halted overnight. They provided a sort of “time out,” too.
“Forbearance is a snooze button. It provides relief and some time for people to figure things out. But it doesn’t change the reality of what is.”
— Craig Martin, J.D. Power
But forbearance is not a long-term solution, no matter where it comes from, and it comes with its own set of challenges, says J.D. Power’s Martin.
“Forbearance is a snooze button,” Martin explains. “It provides relief and some time for people to figure things out. But it doesn’t change the reality of what is.”
In fact, Martin points out that taking advantage of an offer of forbearance isn’t like waving a magic wand. Traditionally forbearance programs have enabled a halt to the necessity to pay, but payments and interest continue to add up, and generally had to be paid off in a lump sum. Three months ago that seemed OK, but in light of today’s unemployment picture, it seems a very temporary value. Even using a real snooze button doesn’t negate the fact that one must eventually get out of bed.
Martin points out that not all mortgage lenders and servicers necessarily thought forbearance was something to encourage wholesale. Offers generally fell into one of three categories:
- Easy to apply for: Often featuring an online form, these lenders made it easy to get on the list, and appealed to initial mortgage-borrower anxiety.
- “Here’s the deal, call us”: This group put the forbearance it was willing to offer on the table, but consumers had to call in.
- “We’re here if you want to talk”: This group didn’t get into any detail, but suggested that if payments looked like they could become a problem, they had people standing by to talk.
The most realistic of the companies seemed to appreciate that “forbearance only lasts so long,” says Martin.
Nevertheless, worried borrowers have sometimes found it appealing. In mid-May the Mortgage Bankers Association indicated that the overall forbearance percentage stood at 8.16%, with Ginnie Mae-backed mortgages at 11.26%, due to a user base that is typically in jobs harder hit by coronavirus shutdowns.
TransUnion’s Mellman notes that initially forbearance status meant that the mortgage could not be refinanced, taking advantage of current low rates. This policy was amended in mid-May by Fannie Mae and Freddie Mac. Now the borrower can seek a refi if they have made three consecutive payments on time.
In early May Fannie Mae indicated that the percentage of its loans in forbearance could rise to 15% in 2020.
True Picture for Mortgages is Worse When Aid is Stripped Out
Research by TransUnion indicates that forbearance has masked the full effect of the economic slowdown on the housing sector.
The study, released in late May, indicates that serious delinquency rates were mostly stable, year to year, in April. The study further found that delinquencies dropped between March 2020 and April 2020.
“However,” TransUnion states, “the true consumer credit picture may be distorted because of federal programs and those provided by lenders to alleviate some of the financial hardships borrowers are facing.”
The study looked at the percentage of four basic consumer credit types, including mortgages, breaking out those classified as being in “hardship status.” This includes factors such as deferred payments, frozen accounts and frozen past-due payments. In April that level hit 5% for mortgages, the highest level out of all four credit categories.
Consumer credit performance in four key areas
| Timeframe | Auto | Credit Card | Mortgage | Personal Loans |
|---|---|---|---|---|
| Percentage of accounts in hardship | ||||
| April 2020 | 3.54% | 3.22% | 5.00% | 3.58% |
| March 2020 | 0.64% | 0.01% | 0.48% | 1.56% |
| April 2020 | 0.51% | 0.03% | 0.48% | 0.30% |
| Percentage of borrowers 60 or more days past due (DPD) | ||||
| April 2020 | 1.33% | 1.87%* | 1.27% | 3.27% |
| March 2020 | 1.37% | 1.96%* | 1.40% | 3.40% |
| April 2019 | 1.11% | 1.78%* | 1.32% | 3.35% |
*Credit card delinquency rate reported as 90+ days past due per industry standard
Source: TransUnion
TransUnion believes that the true level of credit impact hasn’t been felt yet, between various forms of relief, including forbearance, and the temporary and shorter-term benefits of tax refunds, federal stimulus payments, and unemployment benefits and federal augmentation of those payments.
“These factors have led to improved cash flow for some consumers in the near term, but a critical component to the future of consumer credit is a better understanding of how loans that have been deferred will be repaid,” the study reported.
The Deeper You Dig, the More Trouble Seems to Be Coming
The TransUnion table above is based on the percentage of borrowers who are 60 days or more past due. Around the same time that information was released, Black Knight, which specializes in mortgage information, found that the portion of mortgage borrowers who were 30 days or more past due had risen to 6.45% in April — almost double the level seen in March. The company says this was the highest single-month increase ever recorded, and almost three times the previous single-month record, set in late 2008, during the financial crisis.
Black Knight notes that the percentage reported includes both those past due who are not in forbearance as well as those in forbearance who did not make an April payment.
In a white paper Accenture suggests that forbearance is going to be the first wave for many lenders. In the second wave, many of those who haven’t sought forbearance will be among those falling into the 30-day past due category. Many who have mortgages outside of the federally backed sphere will be in that wave, Accenture suggests. The third wave will be where consumers who are really put to it will feel the impact of the COVID-19 slump.
“Many borrowers will likely be unable to regain their financial wellness and resume paying their mortgage by the end of the forbearance plan. They may need some sort of repayment plan, modification, or liquidation,” Accenture says. “This will start with non-federally backed programs, followed by those in federally backed programs.”
People are Trying to Bolster Their Credit Status
Consumers appear to be taking precautions, based on TransUnion’s analysis of April credit card patterns. The company found that beyond cutting back on card usage some consumers have been paying down credit card debt as they can in order to ensure future access to liquidity. The average American credit card balance fell in April to $5,369, the company reports, a change of almost -9%.
TransUnion notes that consumers have also been increasing their excess payments on personal loan balances. This is the amount above required payments. That increased, on average, almost 11% to $215. The boom in online unsecured personal loans has come to a halt as companies offering those have had to pull back due to less funding being available.
To a degree these measures taken by consumers have been assisted by the temporary cash infusions described and in some cases due to forbearance and other temporary easing.
All this said, the real economic impact won’t begin to be seen until the extra funds made available are wrung out of the numbers.
“We are likely to have a better sense of the true financial health of consumers impacted by COVID-19 in the coming months,” says Matt Komos, Vice-President of Research and Consulting at TransUnion. Unfortunately, he add, “The reality is, if you lose your job, you’ve lost your job.”
“Lenders need to think of how to help consumers as best as they can. We think they will be open to exploring new ideas.”
— Matt Komos, TransUnion
“There’s a lot to be determined,” Komos observes. In late May, for instance, New York Governor Andrew Cuomo spoke glowingly of the hope for New-Deal style spending on public works. But in the day of the original New Deal many more people had physical jobs. You can’t easily turn retail and service economy and office workers into skilled construction, bridge and tunnel builders.
Given how difficult it may be to find a job with similar pay levels to those that qualified the consumers for mortgages in the first place, how readily they can resume paying home loans on a timely basis remains to be seen. News coverage indicates that many of the companies that say they are hiring are typically offering lower-wage work — Walmart is hiring to serve additional demand and Amazon has been hiring to staff up its warehouses. And many forms of gig work, a fallback early in the COVID-19 slowdown, have become less available.
“Lenders need to think of how to help consumers as best as they can,” says Komos. “We think they will be open to exploring new ideas.” One already put into motion is Fannie Mae’s offer to permit up to 12 deferred loan payments to be tacked onto the end of a mortgage if a borrower is able to begin paying their mortgage on a timely basis again.
Looking at the Road Ahead for Mortgages
COVID-19 is like a big bowling ball rolling through finance. What else is coming for home lending?
During its first quarter 2020 earnings call, Fannie Mae noted the following predictions:
• Home sales will decline over 30% during the second quarter as consumers attempt to limit credit exposure. [In April sales fell by 17.8%, according to the National Association of Realtors.]
• Home construction will fall sharply in the second quarter and will be off by 8% by yearend. (In mid-May, this was affirmed as far as April. The Census Bureau reported that housing starts were off by 30.2% from March levels.)
• New mortgage lending will be up by almost 10% in 2020, but that will reflect rising refinancings, which Fannie Mae expects to rise to the highest level seen in 17 years. By contrast, in line with falling home sales, purchase mortgage activity will fall.
• Home prices overall will be flat. Before COVID-19’s impact Fannie Mae had anticipated a 4% increase in prices over 2020. And that was on the heels of several years of steady increases in home prices.
Freddie Mac, in its quarterly forecast made in April, suggested that home sales levels will not rise for a year. The organization does not expect a collapse in home prices for two reasons: a “large supply deficit” in the U.S. and “population growth and pent-up household formations [that will] provide a tailwind to housing demand.”
Harvard’s Joint Center for Housing Studies notes that thousands of homes have been pulled off the market, as would-be sellers attempt to wait out the coronavirus slump.
J.D. Power’s Craig Martin says that while volumes are off, they aren’t absent. “People are still buying homes and they are still putting them on the market.”
Things could turn out still worse, or improvements could be seen. But the Center notes that “Unfortunately, we won’t know the full picture of COVID-19’s effect on housing markets until long after the virus is contained.”