Are we repeating history? Not Quite.
Some of you might be thinking, “Is this going to be like the financial crisis of 2008?” It’s a valid concern, but the silver lining is we're more prepared to face and rise out of the situation the economy is facing, because not only did we make it through a financial crisis in 2008, we recovered.
Let’s first take a look at the factors involved in the 2008 crisis. The economy of 2008 was stacked with both mortgage foreclosures and defaults that caused the subsequent bonds they were in to ultimately fail. It was the perfect storm that led to the financial meltdown that we saw and felt.
Spring forward to the first quarter of 2020. We saw measures put forth from Fannie, Freddie, and Ginnie that would allow individuals that could be in foreclosure or default to stay in their homes; until the uncertain times in the United States have smoothed over through COVID-19. Sounds pretty good in theory, right? Maybe.
We need to look a little further into the details before we cheer. The reality is the bonds on these mortgages were sold to investors, and those investors still expect to receive monies owed to them, regardless of the status of that mortgage. Mortgage servicers, even though they’re not receiving their monthly payments, are required make those payments to their investors, which creates a liquidity issue. Mortgage servicers don’t have near the liquidity needed to keep all their pools of mortgages .
Now that we have gotten the doom and gloom out of the way, here are the positives; we went through a financial crisis in 2008 in albeit different but still familiar territory. We have a better understanding of how to navigate the different terrains that arise. We can rest assured that regulators and the government will intervene and provide liquidity shoring in the mortgage market
Simply put, our industry has a detrimental yet repairable cash flow issue, but repairing this issue requires financial finesse and sacrifice.
So, you might be asking, how does this affect the average borrower? Good Question.
It destabilizes the market ( rates). When the market isn’t stable, lenders aren’t confident; so, to protect themselves, they must be conservative when lending, i.e., they can’t afford to have high-risk mortgage loans on the books. We saw many lenders move to increase credit score requirements on government loans last week into this week, creating uncertainty in the market on whether borrowers could procure loans or not.