Category Archives: Mortgage Information

Dirt-Cheap US Mortgages Twarted by $5bil in Margin Calls

The Federal Reserve’s emergency rescue of the U.S. mortgage market should have set off celebration among lenders trying to keep up with demand from borrowers. Instead, executives at Quicken Loans got a hefty margin call.

That was just a fraction of the pain the Fed unintentionally inflicted on lenders in mid-March when it announced plans to buy a massive amount of mortgage securities. The move, meant to steady the market, caught many lenders by surprise and tipped their routine hedges deep into the red.

It’s added to strains throughout the industry that have left the gap between mortgage rates and benchmark Treasuries the widest since 2009. Back then, bank failures and concerns about the housing market kept home loans from becoming cheaper for borrowers. Now, it’s obscure parts of the financial world that are holding back efforts to shave thousands of dollars from many Americans’ biggest expenses — their mortgages.

“The Fed came in trying to help, but they overshot,” said Phil Rasori, chief operating officer of Mortgage Capital Trading Inc., which says it handles hedging for about 20% of the mortgage market. He estimates margin calls initially drained as much as $5 billion from lenders before the Fed eased off, posing “an existential threat” to some nonbanks that operate on thin cash cushions, selling off loans as soon as they’re made.

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Mortgage chaos threatens to worsen once it’s time for repayment

The problem is confusion over what will happen when borrowers have to make up those payments. Federal agencies that back most of the market have introduced policies, some of which could require documentation that overwhelms servicers, leading to lengthy wait times and, in extreme cases, foreclosures.

Industry executives say Fannie Mae, Freddie Mac and their regulator are attempting to unveil a program in coming weeks that could alleviate many of the problems. Mortgage lenders say they hope the companies and their watchdog come up with a plan that prevents a repeat of the turmoil that followed the 2008 financial crisis, when confusion and delays hindered borrowers in trying to resume payments.

A Fannie spokesman referred a request for comment to the regulator, the Federal Housing Finance Agency. An FHFA spokesman didn’t comment on whether there is a fix in the works. A Freddie spokesman didn’t respond to requests for comment.

The $2.2 trillion stimulus package passed by Congress last month requires mortgage companies to let borrowers delay payments for at least six months if they have been hurt by the pandemic. Because the government wanted to provide help quickly, borrowers merely need to say they face a hardship to receive aid.

Fannie and Freddie have released an array of more-complicated options. Borrowers can choose to repay the forbearance in as long as 12 months, but if they can’t, they have to apply for a loan modification, which servicers say could trigger delays and documentation issues like those that occurred after the 2008 crisis.

An FHFA spokesman said Fannie and Freddie forbearance repayment options “allow servicers to work with borrowers to find a repayment option that works best for all parties.” He noted an FHFA announcement on Monday that made clear borrowers won’t be forced to repay forbearance in a lump sum.

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Home lenders growing more cautious

Mortgage lenders are battling economic uncertainty by raising minimum credit scores, requiring higher down payments, triple-checking employment status and even eliminating certain loan types altogether.

As job loss reached staggering heights due to the coronavirus pandemic (more than 16.8 million workers have filed jobless claims in the past two weeks), fear strikes deep among lenders worried that high unemployment numbers will translate into mortgage defaults and late payments down the road.

Lenders handpick low-risk borrowers as bulwark for cratering economy

Chase recently announced that it would raise its minimum credit score requirement to 700 and hike the minimum down payment up to 20 percent, from 3.5 percent. Lenders large and small across the country are following suit.

Wells Fargo and US Bank both adjusted their minimum score requirement to 680 (including for FHA and VA loans, which typically feature lower credit-score requirements as low as 580), while Flagstar Bank upped its minimum to 640. temporarily stopped offering FHA loans, while also increasing its minimum  FICO score for borrowers. They’re still offering jumbo loans; however, they no longer lend to anyone with higher than an 80 percent loan-to-value (LTV) on jumbos.

Navy Federal Credit Union also stopped offering FHA loans, with the hopes that they will resume that product in early 2021, “but that’s not fully confirmed at this point,” said a spokesperson for Navy Federal Credit Union.

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