Forebearance Many people have fallen on hard times and for some the right solution may be to temporarily suspend their housing payment. While this might be the right solution for some, it can also be a dangerous solution if the terms are not clearly understood. A mortgage forbearance does not mean mortgage forgiveness. While the US Government has put forth recommendations for banks to issue forbearances without reporting negative credit to the bureau’s, and temporarily halted foreclosures, they stopped short of issuing guidance to the banks on how to execute a forbearance. They did not define any standard rules as to how mortgage lenders should manage forbearances or more importantly what to do once they enter the recovery period. Therefore each bank is left to develop its own policy on how they will manage this and this could be problematic for some forbearance applicants. The last thing any of us want to see is someone that is in a bad situation and accidentally making it worse.
Here are some considerations for clients seeking a forbearance. They need to talk directly with their loan-servicer and find out what the forbearance consists of and what the terms are.
Will the repayment result in a loan modification? Remember if the borrower has a 30 year loan and the servicer decides to add the deferred payments to the end of the 30 year loan, this would require a loan modification because the original terms was set for only 30 years. (If the loan is modified the applicant may not be eligible for another loan for 4 years per current Fannie Mae rules) How will property taxes and insurance be managed? Will there be any lump sum payments or increased payments to recover the deferred amount? Are there any fees being added to the loan? If so, how will that be structured? The borrower needs to be able to afford all of this once the loan returns to full service. The bank has no obligation to re-qualify the borrower, therefore it is up to the applicant to make sure the terms are manageable before they accept the forbearance. Keep in mind that although the banks will not report negative credit to the bureaus, there’s nothing that prevents banks from changing their guidelines and deciding not to issue a loan to someone that had a forbearance. So in other words the comparative effect is the same as having it shown on your credit. Meaning that a person who accepted a forbearance may have difficulty getting a new loan in the future, if banks create overlay guidelines or have internal policy changes restricting this. There’s no way of knowing how all of this will eventually play out because each bank can set their own rules based on their risk policy. Perhaps there will be more guidance coming from Fannie Mae and Freddie Mac on this topic, but as of the time of this writing there is no specific guidance. The most important thing to consider is affordability. Can the homeowner afford their housing payments once the forbearance period expires? While the banks can’t do a foreclosure right now, they will be able to do so in the future and this can create a situation where a person with a lot of equity in their home could face a foreclosure. (Unlike the last recession when people
lost homes because they were upside down in value, this is exactly the opposite and even more devastating.) The Future of Real Estate – Short term and Long term. So where do we go from here? That’s the question everyone wants to know. I certainly don’t have exact answers to this question, but I will share some insights that will help prepare you and your family for what may be appropriate for the remainder of 2020. Let’s start with the source of this problem, Covid-19. No matter what the Federal Reserve does, there’s no amount of money or economic policy that will restore normalcy to the economy, or in our case the Real Estate industry, other than a cure or resolution to Covid-19. Once this virus subsides to an acceptable level, then we can shift our focus to economic recovery. According to Dr. Mike Rozien who is the Chief Wellness Dr. at the Cleveland Clinic, there is data suggesting that the virus will behave with seasonality, meaning that it will start to lessen in the warmer months. He also suggested that there may be a vaccine available towards the end of the year, which would be a game-changer because it will make people feel much more comfortable with going to public places. The economic shut down and the stay in place orders have already slowed real estate activity. It has also cast a spotlight on buyers and sellers that are willing to enter a sales contract, in spite of current events. Let’s face it, casual buyers and sellers are on hold. Most of the sellers that are on the market today, have a strong motivation to sell –for whatever their reason, whereas the same can be said about buyers. The buyers that are willing to get out there and shop right now are doing so because they have a strong motivation to buy. They’re secure in their income and they’re willing to do what it takes to get into a home. So we find ourselves in time of slower activity, but working with determined buyers and sellers that are serious about their transaction. Current market activities are continuing at a fraction of normal for this time of year and if the “stay at home” orders continue beyond the month of April, it’s fair to say that we’ll see a much a deeper impact on housing prices.
Don’t be fooled by softening prices over a few months to misread as depreciation or having the bottom fall out of real estate.
We are nowhere near that and not likely see a complete failure of the real estate market as we did in 2007-2010. The RE market was very strong in January and February and experts predict that the strength of real estate will carry on and provide some resilience.
The market may have shifted from a seller’s market to a buyer’s market nearly over night, but that doesn’t mean that sellers are willing to just drop their sales price to ridiculous levels. Sellers will give this a few more months before they start to drastically drop prices. The more likely scenario is that buyers will stop over bidding and there may be less competition between buyers. (of course this varies by area and price point) Sellers may be more included to do a slight price drop or they might be more willing to entertain closing costs concessions so that they can move forward. This advantage may favor the buyer for a short while, don’t misread that to mean sellers have no power. Sellers that are priced right will continue to hold firm and overzealous buyers that were looking for a steal, will continue to be on the outside looking in. Inventory is still low and we have a lot of new household formations that continue to come on to the market. Housing supply may come up a little and we may reach a neutral balance for a short while, but I’m certain that inventory levels will remain tight and as the economy starts to regain traction we’ll be back in a sellers markets. Unemployment is another big component of this pandemic. Those that have lost their jobs are relying on savings and unemployment income to get by and they aren’t likely to re-enter the housing market until they get re-employed and in many cases until they restore their savings. The projections for the unemployment rates are massive. Even after the Country enters the recovery phase I’m hearing estimated unemployment rates anywhere from 15-20% depending on the method of calculation. This level of unemployment is one of the biggest threats that we see in Real Estate. If homeowners don’t get back to work soon, we will see more inventory coming on the market as people may be forced to sell their home to access equity. In the last recession of 2007-2010 we saw many foreclosures, short sales and distressed home sales. This scenario is just as bad, only these listings won’t be short sales or foreclosures. These will be standard sales driven by homeowner’s inability to make payments even though the property may have plenty of equity. So while I expect real estate to soften in the next 1-6 months, I do expect interest rates to remain low and I don’t foresee any rapid depreciation or sudden drops in housing prices. According to housing industry expert Ivy Zelman, she recently reported her 2020 updated national forecast for residential real estate that shows the projected residential housing appreciation will go from 5% to 2% year over year.This is very important and you need to make sure that you clients understand that homes are still appreciating year over year.
So while there may have been a 5% projection in January, that isn't going to happen, new homeowners are still projected to receive 2% or 3% appreciation for this year instead. Perhaps a seller of a $500,000 home may have to drop their price by 3% (which is $15,000 meaning that house will now sell at $485,000). The new homeowner will still make 2% or 3% on this property in about 1 year. Another worthy note that Ivy made was that we may see a resurgence to rural and country living as people’s behavior may change in the post-coronavirus era. Her thinking is that many who live in high rise buildings or high density housing, will want to get away from that type of living and may opt to buy homes in areas where they have more space and less interaction with others. There’s no scientific proof of this yet, but it’s an interesting observation to watch on human behavior. One area of concern that I am carefully watching is the market place for higher priced homes. I won’t go into a lot of detail here because it would take 3 more pages of writing to fully explain the issues surrounding jumbo financing. However you need to know that banks have seriously pulled back from lending in the jumbo category and financing any loans over $765,000 will be difficult to close. This challenge will persist for the next few months until the financial markets return to a normal state. In short, banking liquidity issues have constrained available financing for Non-QM loans which includes, jumbo loans and specialty financing. If you want more info this please reach out to me.
5 Things you can do In the short term, know that real estate was very strong going into this pandemic and that real estate is much more resilient than other markets are. Don’t get scared by movements of the stock market. The stock market has nothing to do with how real estate prices are set and has minimal impact on the housing market. During these tough economic times, interest rates will remain low and this will attract new buyers. Know your numbers. For example a buyer that was approved to a $500,000 loan amount a year ago could now afford a house at $550,000 for the same payment as before because rates are lower than last year.
Keep expectations tight – while times of crisis can often present opportunity, don’t allow buyers to think that they can just low-ball offers because times are tough. Inventory is still very low and as new buyers continue to enter the market because of new household formations. (Driven by a spike in birth rates in the 80’s these young adults are today’s first time buyers) We will return to a seller’s market and housing will accelerate once again. Pace yourself - Don’t get into a 30 day escrow right now. Request a 45 day or even a 60 day. All banks and lenders are backed up right now and in many cases employees are working from home. If the escrow can close sooner, we will do that, but trying to force a 30 day escrow in this environment just adds stress for everyone. Let’s work together. Communicate, communicate, communicate and we’ll get through this together to provide a great outcome for all.
Additional Resources
Fannie Mae’s resource page for Covid-19
Forbearance Details Bank by Bank
SBA Payroll calculator for SBA Loans
Tips on Recession proofing your finances
I hope you found this white paper helpful. Feel free to share this with anyone that you think will benefit from it and as always reach out to me if I can be of assistance to you or your clients.