Real Estate Crash thread

[skaredshtles]

When, got a date in mind? I tossed my Magic 8 ball years ago so need some help.

I'll tell you in 2025.

[Mazderati]

More anecdotal RE stuff; house up the street that has been on and off the market the past year, FSBO listing just dropped their price by $25k. I don't think that's going to do anything given the current environment.

Same thought here. The market of buyers is at least smaller. But, then you have several comments above showing things are still moving in some locales. It would take a fire sale to get me through the door right now.

[Ted Striker]

There are always two classes of buyer: leveraged and not.

[Ted Striker]

It would take a fire sale to get me through the door right now.

Yeah, the other shoe is still midair.

[Whiteroom_Guardian]

Seeing first trickle of price decreases on SWMT MLS.

[Rideski]

I’m hopeful that millions of people will decide community living with common entrances and elevators is not desirable and SFH residence prices stay strong.

[liv2ski]

Damn, the mortgage lending markets are fucked up:

Mortgage Crisis and Fed Unintended Consequences
March 26, 2020


The Coronavirus Meltdown
The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.
Here’s How The Mortgage Market Works
Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which many or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts.
The Servicer’s role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.
Servicer Dilemma
As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio.
But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.
“I’m From The Government And I’m Here To Help”
In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility.
But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.
Mark To Market
This week - Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.
Unintended Consequences
The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes.
If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.
Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.
But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls are staggering. They run in the tens of millions of Dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.
Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing.
Even Stephen King Could Not Have Scripted This
It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.
Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.
What Needs To Be Done Now
Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.
We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.

Barry Habib

[MakersTeleMark]

Real estate just named as a critical service in Colorado:

https://www.colorado.gov/governor/ne...tical-services

[wolfelot]

How many Fraser area condos on the lower end of the market are going to come onto the market soon with some level of stress and the owners wanting out?

For example, a Front Range household with two good jobs, a mortgage in town, kids, and a condo in WP/Fraser/Granby that needed to get rented on AirBND at least 1/4-1/3 of the time to really work without sweating it. That scenario was working the past few years for them.

However, now they are potentially a household with that condo not being rented at all for at least the next few months and then very slow rentals for quite awhile after that, and at least one of those good jobs is now totally gone or under major layoff threat.

Is this general scenario at all likely to play out and will prices go down and inventory up in the below $450k market.

[mattig]

Damn, the mortgage lending markets are fucked up:

http://www.mortgagenewsdaily.com/mor...og/940056.aspx

[MakersTeleMark]

Earnest money tends to be a lot more than a couple grand around here. I'm representing a seller and the buyer couldn't close at the last minute. Earnest money was 14K for a condo in the upper 300's.

Nice ROI.

[goldenboy]

Seeing first trickle of price decreases on SWMT MLS.

Haven't seen any of that at all in CB/Gunny. Wait and see approach- the "hotsheet" (new listings, new U/C, Solds, price changes) has been in the single digits most days.

[Kevo]

Been going back and forth with my mortgage broker about refinancing my house and just shooting the shit about the mortgage world.

He thinks rates could go down again for conforming first home refi's that are easy to close (high FICO, good DTI, etc). Other things not so much. Luckily I'd be an easy close.

He said that the availability of competetively priced jumbo and 2nd home loans has almost dried up entirely. I was thinking about buying a vacation house in December and had an offer for a 2nd home jumbo with 20% down at 4%. Thats apparently not anywhere close to available today.

I'm glad I didn't buy at the time. Surely the high rates in the 2nd home/jumbo world will compound with lack of STR demand and affect mountain town real estate? I heard CB was down 30% YoY for tourinsm numbers before the virus shut down the resort.

[goldenboy]

I heard CB was down 30% YoY for tourinsm numbers before the virus shut down the resort.

Not sure where you heard that. Since Vail doesn't release numbers, it's harder to figure that out. I certainly haven't heard or seen anything like that. Seemed "normal" busy to me, and I know a friend that owns a ski shop was up for the year for their rentals, etc.

Definitely some interesting times for both RE and the mortgage world. The deal that I talked about above blew up while everyone was just waiting for the lender's wire to come through. 5 days later they finally admitted that their private funding source stopped funding. Literally last second stuff.

In other news, a $2.4M house went under contract in the last hour. Showings haven't been allowed for two weeks here. Maybe the buyer looked at it months ago and threw a lowball out there, who knows.

[Kevo]

Not sure where you heard that. Since Vail doesn't release numbers, it's harder to figure that out. I certainly haven't heard or seen anything like that. Seemed "normal" busy to me, and I know a friend that owns a ski shop was up for the year for their rentals, etc.

Definitely some interesting times for both RE and the mortgage world. The deal that I talked about above blew up while everyone was just waiting for the lender's wire to come through. 5 days later they finally admitted that their private funding source stopped funding. Literally last second stuff.

In other news, a $2.4M house went under contract in the last hour. Showings haven't been allowed for two weeks here. Maybe the buyer looked at it months ago and threw a lowball out there, who knows.

In the long run, I'm sure CB real estate will be fine. They aren't making more Crested Buttes, and we're on track to hit 8 billion people in the world pretty soon here.

[rideit]

In the long run, I'm sure CB real estate will be fine. They aren't making more Crested Buttes, and we're on track to hit 8 billion people in the world pretty soon here.

Imagine what the Four Way will be like when the US has a billion people...

[Danno]

My mortgage guy said he expects 30 year rates to drop below 3 again, but it might be a little bit.

[Name Redacted]

COVID-19 economic crisis not yet reflected in Summit County real estate market:
https://www.summitdaily.com/news/cov...estate-market/

[goldenboy]

In the long run, I'm sure CB real estate will be fine. They aren't making more Crested Buttes, and we're on track to hit 8 billion people in the world pretty soon here.

Very true, most things are a long game.

Rideit- There would probably be riots before the 4 way got a stop light, even with a billion people. Ha!

[skaredshtles]

Very true, most things are a long game.

Rideit- There would probably be riots before the 4 way got a stop light, even with a billion people. Ha!

They should turn it into a roundabout.

[goldenboy]

They should turn it into a roundabout.

That was a possibility when they re-did it ~10 years ago and added those turn lanes. They really, really want a roundabout by the school as you enter town.

Edit for Kevo- I was just editing my podcast interview with John Norton, head of the local tourism association. In the interview, he actually says both Dec and Jan were up 6% YoY and the data wasn't in for Feb. Such a weird interview to edit, we recorded just a couple days before things got crazy.

[skaredshtles]

They really, really want a roundabout by the school as you enter town.

Seems like a good idea for that location...

[CascadeLuke]

Kind of a whoa. Since the close down order 3days ago (no enter) - 1512 properties went pending on the NWMLS. Basically 1500 in western WA.

[Ted Striker]

Every morning my wife looks at that and yells "you're not going to believe this - even more listings!"

[Name Redacted]

Not sure about the rest of the country, but for here, listings always increase in the spring, after ski season is over. Right about now. So it is tough to tell if any increase in listings is corona related, or just the seasonal churn.