How to navigate mortgage application landmines during a pandemic
By Jeff Lazerson
Boy, that was fast!
In a matter of weeks, year-over-year home price appreciation rates in two big California metros made a U-turn, escrow contracts shrunk and millions of jobs have disappeared. The future for our housing market is bleak and lending is getting murkier by the day.
Economic fallout from the coronavirus pandemic has already woven its way into home values with declines found in the Los Angeles-Orange County metro area, according to data compiled by the American Enterprise Institute.
Of the 40 largest U.S. metros it studied, only Los Angeles and San Francisco metros showed consistent year-over-year declines, the institute wrote April 20.
From mid-February into March, the L.A. metro HPA dropped to 0.9% from 4.2%. The San Francisco metro faired worse, as its HPA fell 4% from a 2.6% year-over-year increase.
Ed Pinto, the director of the AEI Housing Center, sees home values dropping 4% to 6% nationally by late May on average. “The higher-end will get (hit) harder,” Pinto told me.
When it comes to retailers and restaurants, over time, Pinto predicts a Great Depression-level of 20% or more failure rate. “We will have a very elongated U-shaped recovery.”
How are recent residential purchase escrows holding up? Not well, as 31% of California Realtors polled said they have had a deal fall out, according to Jordan Levine, deputy chief economist at the California Association of Realtors.
“I’m still optimistic on housing once we get past this (pandemic),” said Levine. “More people are working from home and we have a low-interest-rate environment. I still think housing does OK.”
But will it be, really?
Not everyone can work from home.
Orange County’s heavy reliance on hospitality and entertainment jobs could upend its housing market. Dr. Raymond Sfeir, economics and research chair at Chapman University, predicts the county could have 300,000 fewer workers by the end of the third quarter.
With an unemployment rate of 17.9%, home sales surely are going to tank.
“Everybody knows that,” said Sfeir. He predicts a 5-6% drop in Orange County median home prices by the end of the year. He also believes home prices in Riverside and San Bernardino counties will hold up better than coastal counties.
We saw negative oil prices, so what about negative mortgage rates?
“Mortgage rates could go a little bit lower,” Sfeir said. “The 30-year won’t go below 3% as this won’t stimulate much (more) demand.”
Nearly 6% of all mortgages nationwide are currently in forbearance, according to the Mortgage Bankers Association. Separate from a home sales momentum shift, equity is also eroding across the country based on unmade mortgage payments, lopping more debt onto the mortgage balance.
Like it or not, we are flattening the home price curve. With an eye on financing, let’s go behind the mortgage curtain for some clarity on the situation. I’ve got some ideas to help get you through the current mortgage application maze. Here are some best practices that might help:
Don’t refinance before going into forbearance. Lenders are relying on your honesty that you can make mortgage payments. Some are moving toward making you sign some type of mortgage health statement with loan documents.
No refinancing right after forbearance. Almost no one is going to believe your story of COVID-19 financial distress, then sudden financial health.
Find a friend. If your income was cut or you lost your job, you can do a conventional refinance by adding the financial strength of a non-occupant co-borrower for a lower rate and/or cash-out.
You must have absolute trust in this good Samaritan as he or she will be added to your deed. The good Samaritan must be able to trust you as well. If you can’t pay on time, you could ruin good Sam’s credit.
Do you qualify? Mortgage underwriting guidance is in constant flux. Standards continue to tighten as lenders add overlays (above and beyond what Fannie and Freddie require). Make sure you can fit into your lenders credit box before you engage.
Try, try again. If your lender does not get an appraisal waiver with your proud-as-a-peacock value, reduce the assumed value and re-run it through the F & F underwriting engines. My processors are receiving more appraisal waiver green lights this way. You have fewer costs, less worry about being low-balled by a human appraiser and no inspection worries.
Skip the bad credit. If one of the borrowers has lower FICO credit scores, triggering worse mortgage pricing or even a credit denial, perhaps he or she can remain on the title without being on the mortgage application.
Don’t think of your lender as an adversary. Just as you need help from your lender to get your deal done, “Lenders are looking for help from borrowers as well,” said Keith Stubbs, senior vice president of wholesale at Weslend Mortgage.
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