Are Banks Still Lending?

It’s no secret the global pandemic has changed our lives in ways never imagined.

But what type of effect will this have on the Mortgage Industry?

Will you still be able to get a mortgage?

Who will be affected the most and what should you do to protect yourself?

Which Lenders Are At Risk?

Lenders who swim in the riskier part of the pool are most vulnerable.

Hedge Funds and REITs (real estate investment trusts) have come to dominate the market for riskier, commercial real estate loans filling the void left by Banks after the ‘08 Financial Crisis.  Private Equity firms have recently joined Hedge Funds and REITs in this space.  PE firms, once positioned higher up on the capital stack, have seen their risk tolerance decrease; increasingly concerned about the danger of investing at this point in the cycle.  Still, PE firms are programmed to seek high yields on value-add or development projects, so they morphed into debt platforms that offer high-leverage, super-stretch, senior loans.   This transformation enabled them to cap their last dollar at 80% or 85%, and thus, generate superior risk adjusted returns while limiting their exposure to a lower level on the capital stack.

Hedge Funds, REITs, and PE firms fund these riskier loans with short-term, ultra-high leverage loans from banks.  This enables them to allocate only a fraction of their balance sheet vis-à-vis what they’re actually lending to borrowers.  This high leverage loan structure allows them to enhance their ROA (profitability as a function of capital).

Hedge Funds and REITs have also infiltrated the residential space, providing non-QM financing for those individuals whose documented income does not enable them to qualify for the financing they seek.  These are often referred to as “No Doc” or “No Income Verification” loans and are not subjected to the same regulatory scrutiny as Bank loans.

Unfortunately, these firms are now getting margin calls. The banks lending them money are demanding more cash collateral.  In some instances, they’re being asked to post billions of dollars.  To compound issues, during this most difficult of times, Borrowers have stopped making their payments.  Consequently, shares of the top mortgage REITs have plummeted; some by as much as 55%.  Those that are well capitalized have continued to lend.  But many have put their lending operations on hold and sprinted for the sidelines.

Residential Mortgages

The US has had a record 10,000,000 initial jobless claims in the past 2 weeks and BofA forecasts that figure to triple in the months to come.

Many of these potentially 30,000,000 unemployed folks will not be able to make ends meet.  Many will default on their mortgage payments.

The CARES ACT encourages millions of Americans affected by coronavirus-related income disruptions to seek forbearance on their mortgages.  This means no payments for 3 months, at a minimum.  That, in and of itself, is a great thing for homeowners.  It provides tremendous relief when it’s needed most.  However, there are some unintended consequences.

The companies that service the mortgages must continue to make the payments to investors during the forbearance period.  At the same time, many investors who traditionally purchase Jumbo mortgages have exited the market.  This has caused a liquidity crunch.  These two, concurrent dynamics have culminated into the perfect storm.

Wells Fargo has both ceased purchasing mortgages from other lenders while they tighten their own lending policy with higher FICO requirements, lower LTV’s and the elimination of cash-out transactions.  They have the capacity to lend another $384 billion in loans to consumers and businesses trying to get through the crisis but they’re unable to make those loans due to the asset cap imposed on them by the Federal Reserve in response to WF’s 2016 forged account scandal.  The Bank has asked the Fed to remove the cap in light of current circumstances and the extraordinary demand the Payroll Protection Program is putting on their balance sheet.  The Fed may be forced to comply.

Collectively, this medley of circumstances has dried up demand for jumbo mortgages resulting in pricing compression.  This has pushed rates up (more on this next week).

As a result, many residential lenders have left the lending business.  Those that remain are raising their minimum FICO scores, decreasing their LTVs and progressively weakening pricing on their loans.  Some have even pulled Commitment Letters, something not witnessed since the Financial crisis of ‘08.

What should you do?

If you have a loan in process, ask your lender to send you updated disclosures articulating your terms.  If you have been approved, ask that they send you your Commitment Letter.  Make sure the expiration date of your CL does not fall short of your anticipated closing date.  Ensure your rate is locked!  Finally, talk with your banker.  Make sure everything is ok and confirm there are no surprises (i.e. guideline amendments) coming down the pike.

Fortunately, Citizens is still actively lending and committed to continuing their position as an industry leader.

Since this crisis began, we have honored our Commitment Letters, continued our high volume of closings and have many more closings scheduled in the weeks to come.

Virtual Closings

Over the past two weeks we have managed to get all scheduled closings consummated and funded by seamlessly transitioning to a virtual closing protocol.   Although we were early adopters, acclimating to this new reality on the fly, we have continued our delivery of flawless execution.

If you’re contemplating a refinance, please give us a call as our rates remain extremely low.

If you are in contract to purchase a new home and are seeking financing or are being subjected to a restructure by your current lender or have been told your financing will not be honored, please give us a call.  We will do what we do best – CLOSE LOANS!

Seth J Dolce

Citizens Bank

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