The oil price war between Saudi Arabia and Russia added to the growing coronavirus crisis caused stocks to plummet over February and March 2020.
On March 11, 2020, the World Health Organization declared the Coronavirus outbreak a pandemic (1). Then, when President Trump declared a national emergency on Thursday, March 12, the Dow Stock Index tumbled.
Trump’s announcement to ban flights from Schengen countries and to stop large gatherings in a bid to slow the virus spreading has resulted in all kinds of businesses suddenly taking a huge hit.
A large chunk of the population could be impacted by the virus. Unemployment will rise and people will lose income, but the banks are going to be lenient over the next 3 to 4 months (2). There’s even talk that the Federal Reserve may cut interest rates to 0%.
While these are undeniably tumultuous times, there’s a chance for you to benefit.
The Federal Reserve has pumped $1.2 trillion into the market to maintain liquidity in the face of impending crises.
And all this boils down to good news for homeowners taking advantage of record-low interest rates and refinancing their homes.
How Does the Coronavirus Affect Mortgages?
The WHO’s announcement prompted a stock market correction which means the stock index fell by at least 20% after a long-term high.
Resultantly, stocks are now entering a bear market (3). If you’re not already aware, a bear market is indicated as a sharp descent on a stock index graph. The decline is where the name bear comes from in reference to a bear swiping its paws downward. When the stock market is doing well, it’s called a bull market after a bull-leaping up into the air.
Mortgage-backed securities are a type of bond made up of money made from the mortgage servicer’s sale to the bank.
For example, imagine you want to buy a home that costs $500,000. To buy it, you go to the bank and apply for a mortgage of $500,000. If approved, the bank pays for the home and you agree to make repayments over a predetermined period.
The bank needs to earn money for lending you the money so they add interest at, for example, 5%.
For the term of the mortgage, typically 30 years, the bank would receive the payments and interest until the loan is paid off in full. The bank has to keep and administer the mortgage for 30 years, and so the money is tied up in the loan.
To release capital from this loan, the bank sells the loan and interest agreement to mortgage investors so that it frees up cash. The bank can then continue to make money from the loan by charging fees for supplying and servicing mortgages.
When banks sell mortgages to investors, they bundle hundreds or even thousands of mortgages together into one instrument sold as a single bond. Investment banks split this bond into portions and these are sold to other investors.
So, when you pay your mortgage off to the bank, your money goes to the investors who bought the smaller bonds.
Stocks and Bonds
Mortgage rates are directly affected by the stock market. When companies stop making money, investors sell their stocks as they are worried they’ll lose on their investments and hungry for capital.
The funds raised from stocks get reinvested in less risky treasury bonds.
Treasury bonds are attractive to investors in a recession as they’re the least risky type of investment and they come guaranteed by the government.
With a weakened economy, then, the price of stocks go down while the cost of bonds goes up. When bonds go up, their yield falls. Yield is the profit earned when a bond matures. When bond yields fall, this pushes mortgages down along with loan modifications.
As mortgage-backed securities are a type of bond, investors start investing in mortgage bonds as they sell off their stocks.
As investors buy more bonds, so their yield decreases making them more expensive to buy with less return.
When bond yields fall, mortgages fall.
And this brings us to the best part for you…
The Good News…
The good news is that rates are at their lowest.
Yields on treasury 10-year and 30-year bonds have fallen to under 1% which is the lowest in history.
The Federal Reserve could likely slash interest rates to 0% to 0.25% to mitigate the looming recession and to ensure liquidity for mortgage lenders (4).
UPDATE: On Sunday, March 15, 2020, The Federal Reserve cut interest rates from 0% to 0.25% as predicted. (7)
Mark Calabria from the Federal Housing Finance Housing Agency advised mortgage servicers on the 10th March to be lenient with homeowners impacted by the virus (5).
Over half of US homeowners have mortgages that were sold to Freddie Mac and Freddie Mae. Both organizations have reassured homeowners that forbearance is an option for anyone having difficulty making mortgage payments during this challenging time.
The Federal Housing Administration has also prompted homeowners to consider the various loss mitigation avenues available if they are worried about foreclosure of their homes (6).
Now is the time to contact your loan servicer to take advantage of the cheap mortgage rates even if you don’t think that you are eligible.
To get the best deal possible in the quickest time, a foreclosure lawyer can find the best possible deal for your circumstances and get things moving much quicker than if you try it yourself.
You may have already attempted to arrange a loan modification with your mortgage servicer unsuccessfully. If this is the case, seek advice from a foreclosure attorney. An attorney is much more likely to be successful in securing a loan modification than if you try to do it yourself.
To reach the foreclosure defense lawyers at Fine Law Offices, please call (800) 939-3819