Unemployment Claims Top 10 Million; Mortgage Industry Faces Harsh Reality
The uncertainty on Wall Street mounts as global cases of the coronavirus COVID-19 top 1 million, and the United States hits 1,000 deaths in one day related to the virus. The Dow Jones Industrial Average closed Thursday on a positive note up 470 points on the news of the oil industry’s biggest one-day rally on record. Through Thursday, equities have more or less traded flat from the start of the week with plenty of intraday volatility in between. Though not as drastic as the 1,000+ point positive and negative swings over the last few weeks, the volatility in equities continues as the virus continues to shutter businesses and keep people at home.
The first issue is employment, or shall we say, unemployment. As the virus forces cities to shut down Americans are losing their jobs in droves. Another stunning report from the Labor Department shows more than six million Americans filed for unemployment last week. That is ten times worse than what we saw in the previous high in 1982 and twice as bad as the new record set just one week ago. When you add that to the previous week’s total, that’s more than 10 million Americans out of work. Expect these numbers to continue to mount in the coming weeks.
March payrolls tanked by 700,000 as the unemployment rate rose from 3.5% to 4.4%, according to the latest jobs report from the Labor Department. This was the first decline in payrolls since September 2010 but it did not eclipse the 2009 peak of 800,000 decline in payrolls.
Keep in mind, the 700,000 comes from businesses surveyed by the government. The household number showed people reporting losses of 3 million. Also, this report relied on data that stopped being gathered the week ending March 12. That means the next jobs report will be significantly worse than this with a much higher unemployment rate. The small silver lining is that wages continued to increase, by 3.1% year-over-year.
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.
This chart from CNBC is simply eye-popping. Look at the last twenty years compared to the last two weeks. The fallout from this many people being left unemployed, or in many cases furloughed, and not receiving paychecks is daunting.
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.”
Thursday morning trading did see a positive move for the oil market after President Trump made comments on CNBC about Russia and Saudi Arabia cutting oil production. West Texas Intermediate Crude saw its biggest single-day percentage gain in history while the benchmark Brent crude jumped by 21%.
This excitement was muted by the question of whether or not the United States would participate in this cut. And, if the U.S. didn’t cut production, would that stifle the plan Trump was tweeting about? Despite any worry, oil did finish up 27% on the day.
Mortgages in Uncharted Waters
In a matter of weeks, the mortgage industry in America has changed dramatically. As mortgage lenders tighten up their product offerings and underwriting guidelines, servicers are already getting hammered with inquiries of missed payments due to job loss and wondering what options are available to them.
As we see millions of Americans struggle with losing their jobs, one of the bright spots of hope for them has been the option to have a forbearance or deferment of their mortgage loans. However, many don’t understand that this is not akin to forgiving those payments.
The department of Housing and Urban Development, along with Fannie Mae, did release some guidelines about who is eligible for the grace periods.
- 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.
Fannie Mae 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
A big part of the misunderstanding is the wording in the recently passed CARES Act as part of the government stimulus bill. That act leads Americans to believe they can just skip their payments and have them tacked on to the end of their mortgage. There are a few issues with this. It leads people to believe they don’t have to take any action and it’ll work itself out. That’s far from the case. They still need to call their servicer to talk about a forbearance plan. Another issue is, those servicers rely on people to be honest up front. That’s a big reason why Federal Housing Finance Director Mark Calabria is begging people who can pay to please pay.
“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.”
It’s estimated that upwards of 2 million people will apply for mortgage forbearance from Fannie Mae and Freddie Mac. Calabria warned that people who are taking advantage of the system will cause a detrimental ripple effect. “If this goes beyond two or three months and we start to get worse than that, then that’s going to be a lot of strain, and certainly we’re going to start to see some firms get into a lot of liquidity trouble.”
The fear 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.
That being said, 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%. However, these low rates are not all positive.
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 aggressive 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 which would allow borrowers to refinance at much lower rates. The Fed accomplished that to a certain extent. But it also created a mark to market loss on hedges that require cash margin to be posted. Although this has always been typical in hedging a mortgage pipeline, the velocity of the move higher created a “cash crunch” and a scramble for many to make those margin calls. Because of the rapid spread of the virus and cities shutting down, many transactions that were locked were unable to close creating even more issues with the inability to close and sell these loans to generate cash.
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.”
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.