Layoffs, a softening housing market and a likely recession are the talk of the town. If you’re a homeowner fearful of losing income in the year ahead, is it time to pull equity from the house — now?
The last housing bust and the ensuing mortgage meltdown that led to the Great Recession were driven by shoddy mortgage underwriting. If you could fog a mirror back in the day, you’d oftentimes be able to buy a home, down payment or not.
Today, we are in the early stages of a very different bust. Rigorous underwriting and plenty of skin in the game (large down payments) have been the norm for the past 10 years or so. Just about everybody is home equity rich.
High inflation and a pending avalanche of job losses are going to squeeze the cash reserves from many homeowners who could soon be scrambling to make house payments. Can you say: Equity rich, financially distressed? For the purpose of this column, ERFD is our new acronym. Remember it.
Set aside for a minute that mortgage delinquencies (at least one payment past due) are at 3.45%, their lowest level since the Mortgage Bankers Association started tracking them in 1979. That’s rearview mirror stuff if you listen to mortgage insiders.
“The delinquency rate will likely increase in upcoming quarters from its record low (in part) because of the anticipated uptick in unemployment,” said Marina Walsh, MBA’s vice president of industry analysis.
The U.S. Bureau of Labor Statistics reported on Thursday that inflation rose 0.4% from September and 7.7% year over year. Freddie Mac’s average mortgage rates rose to 7.08%, only the second time time we’ve seen rates north of 7% since April 2002. Groceries, gasoline, credit card interest rates and utilities are going, up, up and away.
The Bureau of Labor shows us that national unemployment stands at 3.7%. A year from now it will be higher than 6%, according to my crystal ball.
Representing as much as 18% of the U.S. gross domestic product, real estate and its related industries are the number one canary in the economy’s coal mine. Canary number two is big tech. Think Meta, Twitter and Microsoft.
Business has all but stopped for mortgage lenders. And, yes, it’s much worse than the mortgage volume collapse I remember from the Great Recession. I’ve laid off two-thirds of my staff this year. Many mortgage professionals and many realty agents are scrambling to cut expenses and find ways to tap into their home equity.
Let’s go through a financial exam of sorts to see if you are on the edge of becoming an ERFD (equity-rich financially distressed) homeowner.
1) Are you worried about losing your job, getting work hours cut or anticipating a reduced revenue stream if you are self-employed?
2) Do you have less than six months of household cash reserves? For example, if your house payment, utilities, groceries, medical bills, food, and entertainment come to $8,000 monthly and you have $40,000 of accessible money, then you are short $8,000 needed to cover six months of expenses.
3) Do you have a burn rate? That is, more expenses going out monthly than are being replenished by income?
4) Do you have at least 25% tappable equity? (For example: Your home value is $800,000 and the loan balance is $600,000 which means you have 25% tappable equity).
5) Are you close to being late on an upcoming mortgage payment? A single, 30-day mortgage late payment can drop a FICO score 50 to 150 points, potentially ruining any chance of new mortgage credit, according to Mindy Leisure, director of rescoring services at Advantage Credit. (Full disclosure: Advantage Credit is my firm’s credit vendor.)
If you answered yes to three or more of the questions, consider yourself an ERFD.
Policymakers, regulators, mortgage lenders and other industry stakeholders do not want a repeat of the foreclosure fiasco consequences of the Great Recession. They’ve worked hard to put an array of safety nets such as nonprofit housing counseling agencies in place to temporarily help homeowners with their mortgage struggles.
Everything from partial payment to payment forbearance and payment deferral and more may be available to keep you in your home.
For example, HUD offers FHA borrowers special forbearance or SFB when one or more borrowers have become unemployed, and such an income loss has negatively affected the borrower’s ability to continue to making monthly mortgage payments.
Freddie Mac provides a comprehensive list of potential hardships beyond unemployment-such as natural or man-made disasters, serious illness, divorce or death of one of the primary borrowers.
Do you know what kind of loan you have? Is it conventional, VA or FHA? If you don’t know, contact your mortgage servicer to find out what kind of mortgage you have and what options are available. For example, ABC Mortgage may be servicing your loan, but Fannie Mae might own the loan.
For mortgages owned by Wells Fargo Bank, options include forbearance, repayment and loan modification.
“Customers facing (financial) changes should reach out to us as soon as they have concerns about making their monthly payments,” said Tom Goyda, senior vice president. “(They) don’t need to miss a payment to be eligible for assistance.”
My advice? Shore up your budget. Cut expenses where you can. If you have other assets like stocks or retirement money, find out how fast can you access and liquidate these funds. Consult with your tax adviser because liquidating may trigger a taxable event. Do you have family or close loved ones who can lend you a financial hand?
Lastly, give yourself an honest reality check. The government and lender lifelines are temporary, not permanent. If you can weather the coming economic storm, good for you. If you are not sure, ask yourself if it’s better to sell and walk away with some equity.
Black Knight reported that mortgage holders in the U.S. lost $1.3 trillion of home equity in the third quarter of 2022. Homes shed 2.6% of value over the past three months.
I estimate that one year out, we’ll find homes have dropped 10.4% in value.
Freddie Mac rate news
The 30-year fixed rate averaged 7.08%, 13 basis points higher than last week. The 15-year fixed rate averaged 6.38%, nine basis points higher than last week.
The Mortgage Bankers Association reported a .01% mortgage application decrease from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $2,722 less than this week’s payment of $4,341.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875%, a 15-year conventional at 6.625%, a 30-year conventional at 6.125%, a 15-year conventional high balance ($647,201 to $970,800) a 15-year high balance conventional at 5.875, a 30-year high balance conventional at 6.375% and a jumbo 30-year purchase, fixed at 6%.
Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year jumbo purchase mortgage locked at 6.25% for the first seven years interest-only without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.