This article is about the impact of Covid-19 on the Mortgage Industry. At the beginning of 2020, the U.S. housing market was steadily growing with no signs of stopping. Home prices increased from 3.9% in January to 4.2% in February. The forecast for the housing market was stronger than ever.
With the introduction of COVID-19, house sales came to a screeching halt. Interest rates may have dropped significantly, but this was still not enough to increase buying activity. The opposite is true actually with nearly half of all realtors having reported a slow down in business due to a lack of buyer interest. Covid-19 has had an interesting effect on the mortgage industry but to understand the impact, we need to understand the industry.
How the Mortgage Industry Works
The process begins when a borrower goes to a mortgage originator to obtain a loan. Once the sale is closed, the loan is handed over to a Loan Servicer which may or may not be the same company that originated the loan. The borrower will send payments to the servicer, but the servicer does not actually own the loan. They are merely maintaining it.
This means they are responsible for collecting payments and sending them to the investor, paying taxes and insurance, answering questions, etc. While the company services the loan, it is sold to an aggregator or government agency that places the loan into the hands of an investment banker. This investment banker will then convert the loans into mortgage-backed securities that can be sold to the public. They typically show up in investments such as mutual funds, insurance plans, retirement accounts, etc.
The Loan Servicer plays a very crucial role in this process. In order to obtain the rights to service a loan, they will typically pay about 1% of the loan amount upfront. Once they begin servicing the loan, it takes approximately 3 years to break even on their investment, and the longer the loan stays with them the more money they make. Covid-19 has had a significant impact on the mortgage industry that may be detrimental.
Falling Interest Rates
Along with several other economic changes, COVID-19 has affected interest rates. The average for a 30-year fixed mortgage interest rate hit an all-time low of 3.29%. This can be advantageous to homebuyers since it means lower monthly payments and less money put towards interest over the life of the loan.
Falling interest rates tell a different story for mortgage lenders or servicers. With the increased incentive for people to refinance their loans, servicers are left with major losses. Often times refinancing means the loan will be paid off sooner…probably before the 3-year breakeven period.
These losses are multiplied when a servicer has a number of loans on their books. Although these losses can be damaging, the influx of new loan activity due to declining interest rates can give servicers the additional income needed to overcome the losses in their servicing portfolio.
The virtual shutdown of the economy caused an unprecedented amount of job loss. The removal of income from borrowers causes major issues for servicers because borrowers may have difficulty paying their mortgage on time.
Although the servicer may not own the asset, they still bear the responsibility of paying the investor regardless of if they’ve received it from the borrower.
All of these stressors caused by COVID-19 have presented major difficulties for the mortgage industry. Despite many government laws that have made it even more difficult for those in the mortgage industry, many people are finding ways to navigate through these unprecedented times.