Monday, March 30 – Austin Metro Area Real Estate Update
Current Austin Metro Area Inventory
399 new homes emerged on the market in the past 7 days. A 28% decrease from last week.
279 homes went under contract in the past 7 days. A 27% decrease from last week.
259 homes sold and closed this past 7 days. A 2.4% increase from last week.
212 homes withdrawn or temporarily taken off the market. This is up 24% since last week.
Buyer Tours & Open Houses
The Austin shelter-in-place orders have suspended all in person home tours and open houses. Neither buyer agents or selling agents are permitted to open homes for in person tours. Once under contract activities related to executing the terms of the contract are allowed like inspections and appraisals with safety precautions. All showing activity has been shifted to either photography or video format viewing. The Agent Jill Team has moved to virtual & 3D tours offering agents and buyers online solution to preview and explore homes from a safe distance.
Rates continue to fluctuate day to day, even hour by hour. Higher rates are being reported right now for refinances in an effort to discourage the unprecedented high volume of requests.
As of 1pm on Monday rates were resting at 3.25% for a 30 year Conventional loan and 2.75% for a 15 year conventional Lona. Refinance rates are between 3 & 3.5%.
In speaking with our preferred lenders today they are communicating that rates are slowly heading down. The market is still very volatile but headed in the right direction. Mark Abernathy of Capstar Lending says he expects 30 year conventional loans to be around 2.75 in 3 months if things progress as they should. As always reach out to them with questions about refinancing but be patient with them during this busy time.
Mortgage Crisis and Fed Unintentional Consequences – by Barry Habib
The Coronavirus Meltdown
The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.
Here’s How the Mortgage Market Works
Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts.
The Servicer’s role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.
As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio.
But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.
I’m From the Government and I’m Here to Help
In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility.
But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.
Mark to Market
This week, due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a Lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.
The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes.
If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.
Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper, the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.
But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset, on paper, by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls is staggering. They run in the tens of millions of dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.
Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing.
Even Stephen King Could Not Have Scripted This
It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.
Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.
What Needs to Be Done Now
Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.
We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.
Austin Metro Market Overview
As you can see from the inventory numbers above, THE SHOW CONTINUES. The big picture has not changed. Low Austin inventory and normal seasonal housing demands continue to lead people to have to work in this market right now. Yes, there is caution about home values and market stability. But the confidence in Austin’s economic strengths and assets have not changed.
Last week’s blog shared highlights from Austin real estate analyst Mark Sprague about the long term forecast in Austin. These continue to be great reminders as we navigate through this crisis.
“In 2011 Austin led the nation in recovery with the shortest stint of the top 50 metros in recession. The main lesson is that Austin and Texas economically turned quicker than the rest of the country after the last crisis. Why? Because we did not have the amount of speculation or financial leverage that so many markets had.”
“Presently, the Austin economy continues to be based strongly on technology, higher learning, and state government with multiple other channels contributing. That’s important, because many of the metros that experienced the economic crisis were dependent on one or two industries as well as highly leveraged financing. Highly leveraged financing has gone away, and the Austin Chamber’s focus on recruiting multiple segments of industry should help tremendously. Good news is that most of the Texas metro economies have been leading the nation. Presently they do not have enough real estate inventory. Sales continue to be robust comparatively. So far, 2020 sales and real estate values are remaining strong and should remain that way throughout 2020.”
“Austin has been blessed in leading the nation in so many ways. That has placed stress on the lack of real estate inventory in multiple channels. At this point, sales have not shown any slowing. I do think the strength of the current economy will bode well for when we emerge on the other side of this crisis. So no, I would be surprised if we had 180+ days of negative growth after the crisis.”
On March 24th, Mayor Steve Adler issued a “Stay Home Stay Safe” Order, requiring all non-essential employees/residents to remain safely at home, effective until April 16th. Real estate is listed as essential business as long as it is necessary to assist in compliance with legally mandated activities and only to the extent that service can be provided with Minimum Basic Operations. To Realtors this means activities related to active contracts and with all the required safety precautions.