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The truth about unemployment and missed mortgage payments

By: Movement Staff
April 3, 2020

More than 10 million Americans have filed for unemployment over the last few weeks as the effects of COVID-19 continue to spread. Global cases have now topped one million with the United States seeing 1,000 deaths in one day due to the virus.

The ongoing issues with the spread of the virus continue to stifle economic growth as businesses remain shuttered worldwide. And what we are seeing now with unemployment will be felt for many years. An analysis by Payscale, a compensation software and data company, predicts that it will take many Americans 4-5 years to recover from their job loss right now.

The jobs report released by the Labor Department Friday morning is staggering, but is even more stomach-churning when you realize the data used only goes up to March 12. That means the decline of 700,000 on non-farm payrolls doesn't include the last two-and-a-half weeks of the month which is when we saw the gargantuan unemployment claims. The unemployment rate during the period analyzed went from 3.5% up to 4.4%. 

Private payrolls fared a little better posting a loss of just 27,000 jobs according to ADP, however that doesn't tell the full story. Small businesses, those with 49 employees or less, lost a whopping 90,000 jobs while large companies, with 500 or more employees, gained 56,000. 

Some states are being hit harder than others when it comes to job losses. Hawaii, Michigan, Pennsylvania, Kentucky and Rhode Island have seemed to suffer the most job losses over the last two weeks. 

The Labor Department said in its report, “Nearly every state providing comments cited the COVID-19 virus,” adding, “States continued to identify increases related to the services industries broadly, again led by accommodation and food services. However, state comments indicated a wider impact across industries. Many states continued to cite the health care and social assistance, and manufacturing industries, while an increasing number of states identified the retail and wholesale trade and construction industries.”

Housing industry facing new struggles

What the mortgage industry is going through right now is likely going to change the face of the industry forever. Mortgage lenders industry-wide are tightening up their product offerings as investors leave the marketplace and lenders concentrate on the strongest possible loans to make their pipelines valuable. And everyone is talking about a very important “F” word: Forbearance.

As part of the stimulus package, the federal government passed what's called the CARES Act. That would allow for borrowers to simply skip their payments for up to a year and just have the payments added on the back end of their loans. That is causing massive confusion for homeowners thinking they don't have to take any action and assuming this is meant for everyone. 

building your own homeThe U.S Department of housing and Urban Development, along with Fannie Mae, released specific guidelines for folks who are in need of government assistance during this time. However, Federal Housing Finance Authority director Mark Calabria has to hope that people who apply actually need the help. 

"We're operating on the honor system,” says Calabria. “We are asking and we're putting together a script for servicers. This is supposed to be limited to if you've lost your job, you've lost income. Please, if you haven't lost your job, continue paying. If you can pay your mortgage please do so because we really need to focus on the people who can't."

These were the instructions the Federal Housing Authority (FHA) gave to mortgage servicers:

  • Delay submitting Due and Payable requests for Home Equity Conversion Mortgages by six months, with an additional six-month delay available with HUD approval; and
  • Extend any flexibility they may have under the Fair Credit Reporting Act relative to negative credit reporting actions.

Here's what Fannie Mae has sent out as guidelines:

  • Homeowners who are adversely impacted by this national emergency may request mortgage assistance by contacting their mortgage servicer
  • Foreclosure sales and evictions of borrowers are suspended for 60 days
  • Homeowners impacted by this national emergency are eligible for a forbearance plan to reduce or suspend their mortgage payments for up to 12 months
  • Credit bureau reporting of past due payments of borrowers in a forbearance plan as a result of hardships attributable to this national emergency is suspended
  • Homeowners in a forbearance plan will not incur late fees
  • After forbearance, a servicer must work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification

The combination of unemployment, uncertainty on Wall Street and the spread of the virus has undoubtedly contributed to the precipitous drop in purchase mortgage applications. The Mortgage Bankers Association data shows a year-over-year drop of 24% for purchases. 

However, refinances continue to spike as mortgage rates are still very low at 3.33% for the 30-year fixed-rate mortgage average according to Freddie Mac. The MBA report shows that year-over-year, refinance applications are up by a whopping 168%. 

In its effort to keep rates low, the Federal Reserve's plan to purchase billions of dollars of agency mortgage-backed securities was well-intentioned. However, the Fed's solution created another problem. Last week alone, the Fed purchased $183 billion worth of agency mortgage-backed securities in an effort to keep rates low so borrowers could refinance and save money. The Fed accomplished that, but also created another problem as mortgage lenders struggled to sell their loans on the secondary market.  

Because of the rapid spread of the virus and cities shutting down, many transactions that were locked were unable to close. Consequently, many mortgage bankers found themselves subject to margin calls. 

This past weekend, the MBA wrote a letter to regulators explaining their plight, saying “The dramatic price volatility in the market for agency mortgage-backed securities (MBS) over the past week is leading to broker-dealer margin calls on mortgage lenders' hedge positions that are unsustainable for many such lenders.” 

The MBA's letter continued, saying “Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate."

Author: Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.