Home Loans in the Time of Coronavirus

As we await the full explosion of the coronavirus (COVID-19) in the U.S., it’s clear that global supply chains, particularly those originating in China, have been disrupted and that real economic damage has been done.  Whether you believe the virus is just a bit nastier type of flu or something much worse, there will be many unintended consequences along the emerging real estate/finance value chain.

During this pandemic, I was reminded of Michael Lewis’s book The Big Short. It was the only amusing thing to emerge from the otherwise soul-crushing time of the Mortgage Meltdown of a decade ago. The book chronicles the collapse through fraud and incompetence of the mortgage securitization supply chain and the efforts of a brilliant physician and part-time investor named Michael Burry to short the impending disaster. Like all complex supply chains, everything seemed remarkably precise and efficient until it wasn’t, exposing long- ignored risks that incinerated trillions dollars of stored wealth around the world.

I spoke with some innovative thinkers to see what they anticipate during this current uncertain time.

John Campbell, a luxury real estate agent along Connecticut’s scenic coast, sees a pick-up in interest in high-end homes that will provide buyers a safe and comfortable alternative. 

“Overseas travel has become riskier and less desirable. Clients are seeking secure retreats and want significant acreage, not beach houses clustered close together,” Campbell said.

He indicates there is even interest in small islands off the Connecticut coast, which provide the ultimate in social distance. “With rates so low, normally cash buyers are opting for mortgages,” he adds.

This reverses a trend brought on by the cap on state and local taxes, which pushed buyers who could to use cash.

One seasoned industry veteran sees a need to help the other end of the income spectrum. While the true economic impact of COVID-19  is proving very hard to gauge, obvious blows are being felt in travel, food and beverage and entertainment businesses. Washington and the Fed are attempting to fight a potential recession with various kinds of stimulus. This observer, who asked not to be named, feels that something like a new HARP program could be put in place quickly to help dislocated borrowers: “This would put cash into the hands of consumers in a proven process and capitalize on generationally low rates”.

Kim Thompson, an operations and technology executive with a start-up background, believes that the industry’s investments in going digital and in tools such as Robotic Process Automation will permit her teams to work from home and therefore keep their social distance. They will also be able to tend to children who have been released from school. 

Many lenders who have invested in technology to meet the increased regulatory oversight post-crash are leveraging IT to deal with the huge surge in applications. When paper files ruled, the ability to work remotely was impossible to imagine. Now automation means that “We don’t have to worry about these machines coming down with the virus!,” she said.

However, other knowledgeable observers have a different view of the readiness of many lenders. They fear the operations teams will need to be “all hands on deck” to process the spike in volumes and that demands on mortgage employees to be home will sap their capacity and morale leading to messy, delayed closings. Temporary workers that normally help during surges will be less available and equally pulled by demands to self-quarantine.

Some remote work is even possible on Wall Street trading floors. A senior bond trader at a prominent firm notes that half of his traders are working at their desks and half from home to reduce exposure. He states that his team could work entirely on a remote basis if needed, but feels that compliance tracking would be more difficult and is not ready to test that.

Stuart McFarland, a seasoned finance industry veteran and member of several public boards, observes that, inevitably, a number of lenders will not have adequately hedged against the rapid decline in interest rates. 

“Who would have anticipated the 10-year Treasury Bond diving below 1 percent,” he asks. Rates had already been seen as historical lows before the onset. To put hedges on in anticipation of the current rates defied logic.

As always, the cost of buying insurance to that level makes little sense until it did. Unlike the Financial Crisis, banks are seen to be in good shape and the consumer as well.  The obvious question is: How long will the virus threaten us? Will we have an experience similar to South Korea, which appears to have contained it with few cases and fatalities or like Italy, which has suffered a death rate 250% higher?

Back to the business at hand. Predictably in a time of crisis, there are those who leverage superior preparation to grab market share and to expand profits. They may even establish new rules and methods to their long term benefit. The majority of players in the supply chain will muddle through, largely due to the loyalty and commitment of their employees and to the collaboration of longtime partners.  And, finally and unfortunately, there will be those who are exposed as unable to perform. Their failures may not result in immediate removal as a link in the chain, but it is typically long remembered, relegating them to much more marginal circumstances. 

All will be revealed in the next three months. In the meantime, please be well!

Bill Kelvie, a Mortgage Media Advisor, has had a long and varied technology career as a programmer, strategist, CIO of Fannie Mae, and CEO and founder of Overture Technologies. He currently is an advisor to technology start-ups and publishes a blog on technology disruption at AWWEW.com