Deed in Lieu of Foreclosure vs. Short Sale

Last updated on August 25th, 2020

It’s time for another mortgage match-up, with the latest in the series pitting the lesser known “deed in lieu of foreclosure” vs. the more popular short sale.

Nowadays, there are plenty of options to get rid of your home and avoid foreclosure, even if you owe more than the property is currently worth.

By avoiding the full-blown foreclosure process, you can reduce the negative impact to your credit score and ensure the lender won’t come after you for any deficiency balance.

Additionally, you may be able to purchase real estate and qualify for a mortgage much sooner if you go with one of these foreclosure alternatives.

What Is a Deed in Lieu of Foreclosure?


  • As the phrase “deed in lieu” suggests
  • Instead of the lender pursuing foreclosure and taking your home
  • They will allow you to voluntarily deed back your property
  • It’s basically a preemptive forfeiture of the home in exchange for some benefits

In short, a deed in lieu of foreclosure is exactly what it sounds like. Instead of foreclosure, you agree to voluntarily deed your property to the lender.

In exchange for this transfer of ownership, the lender will release the associated lien (mortgage), allowing you to move on with your life.

However, banks will only agree to a deed in lieu if you keep the property in good shape and meet some sort of hardship requirements.

The trade-off is that the bank gets a property free from damages typically associated with foreclosure, and they don’t need to deal with costly foreclosure proceedings.

Of course, with home prices much lower now than they once were, properties are often being dumped for less than what is owed on the mortgage.

As a result, the lender may be able to come after you for the deficiency balance, or the shortfall between the current property value and the loan balance, depending on state foreclosure laws.

If this is the case, you may be on the hook for all or part of the shortfall, which clearly isn’t ideal if you can’t even afford your mortgage payments.

It certainly won’t make your tax returns any more pleasant, especially after surrendering the property to the lender.

This is why it’s imperative that you negotiate with the lender to forgive any deficiency balance before agreeing to one of these deed in lieu of foreclosure agreements. And to get it in writing!

You must also do this with any junior liens, or second mortgages (or thirds). If you don’t, those lenders can come after you for any shortfall in certain situations.

Finally, you’ll want to determine if the Mortgage Forgiveness Debt Relief Act applies to your situation.

Even if the lender doesn’t come after you for any money, Uncle Sam still might by way of tax liability. So there are two potential pitfalls you must try to avoid.

Why Choose a Deed in Lieu?

  • There are several possible advantages to a deed in lieu
  • Including less credit score damage (see chart below)
  • A shorter waiting period to get another mortgage in the future
  • And less required work (compared with a short sale)

Aside from avoiding an outright foreclosure, a deed in lieu may be the quickest option to part with your home if you don’t qualify for some other form of relief, such as a mortgage refinance or a loan modification.

Instead of being tasked with selling your home and waiting for the bank to accept the short sale offer, you can have the bank take care of it.

However, the bank may still ask that you list the property for a period of time before agreeing to a deed in lieu.

Also, a deed in lieu may not be nearly as bad as a foreclosure with regard to your credit score. It will still hurt your credit, but the impact could be less, assuming there is no deficiency balance.

Credit Score Impact of a Deed in Lieu

deed in lieu impact

Check out the credit score impact of a deed in lieu as opposed to a foreclosure, according to FICO. It’s still not great, but it probably won’t do as much damage as a foreclosure.

On top of that, you’ll be able to qualify for a new home loan in a shorter period of time.

Instead of waiting up to seven years after a foreclosure, you may only need to wait as few as two years if you have extenuating circumstances, or four years under normal circumstances.

Lastly, you may be able to stay in your home with a deed in lieu if the lender offers a “Deed-for-Lease” option, as Fannie Mae and Freddie Mac now do (along with Bank of America). Or you may receive some spending money for relocation costs.

For example, Fannie Mae has a so-called “Mortgage Release” program that provides options such as vacating a home immediately, staying for up to three months rent-free, or leasing the home at fair market rates for up to a year. This can be especially helpful if you have limited monthly income.

They may also provide relocation assistance (up to $3,000 to help you move and find a new residence), while also eliminating your remaining mortgage debt. That sounds a lot better than a foreclosure, doesn’t it?

What About a Short Sale?

  • The downside here is that you actually have to do some work
  • As the name suggests you’ve got to sell the place
  • And you need to do so with the approval of your lender
  • This can be time-consuming and a major burden during what is probably already a stressful time

I’ve already written extensively about short sales, which are probably the most popular foreclosure alternative available today.

Put simply, you must convince the lender to allow you to sell your property for less than the associated mortgage balance.

The downside is that you must list your home for sale, which obviously takes work, results in people tracking mud through your home, dealing with annoying real estate agents, and can take many (many) months to finalize.

First off, you need the bank to approve the sale, and secondly, you need to close the deal. It’s a lot more difficult to sell homes these days, so it can be quite a pain.

It’s basically a home sale without the profits at the end, but it might beat the foreclosure process.

However, new rules have sped up short sales, and now that they’re so commonplace, the process can be a lot more effortless.

The result is similar to a deed in lieu in that you are released from the loan once the home is sold, and you avoid foreclosure.

Again, you must ensure that there isn’t a deficiency balance to avoid owing any money on your tax returns after the deal is done.

And if there are second or third liens, they must also be dealt with.

Tip: If you complete a short sale or deed in lieu via the Home Affordable Foreclosure Alternatives (HAFA) program, the deficiency balance must be waived.

The advantages of a short sale are like a deed in lieu in that you can reduce the credit score impact and get a new mortgage sooner. You may also be offered a financial incentive to short sell.

The drawback is that a short sale may be more time consuming and tedious. However, banks are probably more willing to approve a short sale than they are a deed in lieu, especially if there is another mortgage loan is involved.

Though beginning in March, Fannie and Freddie will allow borrowers with illness or the need to relocate for a job apply for a deed in lieu, even if current on their mortgages. This just so happens to be taking place when home prices are on the rise…

In either a short sale or deed in lieu, there are also potential tax consequences, so consult a CPA and/or a lawyer before deciding which choice is best for you, if either. And pay attention to any legal updates on foreclosure laws, as they can change over time.

Read more: Foreclosure vs. short sale


Figure Review: The Fastest Way to Tap Home Equity?

I received a letter in the mail the other day from a fintech company called “Figure” that claims it can approve me for a home equity line of credit (HELOC) online in five minutes.

Better yet, they can fund the thing in as little as five days, assuming I’m able to use their remote online notary and that five-day period doesn’t include a weekend or holiday.

You can thank their 100% digital application for that, along with their proprietary blockchain solution known as “Provenance,” which is also being used by Caliber Home Loans, an unaffiliated lender.

It all sounds lightning fast, so let’s learn more about Figure to determine if they could be a good solution for those looking to tap their home equity.

Figure Calls It the Fastest HELOC on the Planet

One of Figure’s taglines is “Fastest HELOC on the Planet,” which sounds pretty darn quick.

We know they promise to get you approved and funded fast, which is great if you need cash ASAP for say, pressing home renovations, but speed isn’t everything.

The underlying product also has to provide good value relative to similar offerings in the marketplace. It also has to make sense to take one out in the first place.

Most homeowners are aware of home equity products, with the most common and popular probably the home equity line of credit, or HELOC for short.

The Figure Home Equity Line is kind of a hybrid of two products, the HELOC and the home equity loan, though in some instances it may just act like a home equity loan.

How the Figure Home Equity Line Works

  • Apply online in minutes and get funding in as quickly as 5 days
  • Full loan amount is drawn at closing and deposited in your bank account
  • Cash can be used for anything you wish, home renovations, pay off debt, bills, etc.
  • Interest rate is fixed for the entire term, which can vary from 5-30 years
  • Can make additional draws as you repay the initial draw

As noted, we need to learn more about the product itself before making a verdict. Here’s how this thing works.

After approval, which promises to be fast, you receive the entire amount of your initial draw.

So if you request $50,000 from Figure, they give you the full $50,000 at closing.

They also tack on the loan origination fee, which in the example on their website is 3%. So your left with $51,500 because it’s financed as well.

But this fee can apparently range between 0-4.99%, so you may not have to pay anything.

From there, you get anywhere from 5-30 years to pay back the outstanding balance, depending on the term you choose.

How the Figure Line of Credit Is Unique

Figure compare

It differs from a traditional HELOC in that the rate is fixed, more similar to a closed-end home equity loan.

And you take the entire loan amount out at origination, which again is more like a home equity loan than a HELOC, which usually has a small (or no) minimum opening draw amount.

Another difference is that the Figure Home Equity Line is an open-end product that features a draw period, like a HELOC.

As you repay the initial draw, you can take additional draws up to 20% of your original loan amount, which is the initial draw amount plus the origination fee.

These subsequent draws must be at least $500, but cannot exceed 20% of the total loan amount or the available limit on your line.

If you take subsequent draws, the interest rate at the time of the draw applies to each draw and is fixed as well.

The interest rate is based on the prime rate at the time of the draw, plus a fixed margin, which likely varies based on your loan parameters, such as credit score, occupancy type, LTV, and so on.

These additional draws will not extend your loan term, though they can only be taken 2-5 years from your origination date, depending on the term of your loan.

Some Issues to Consider

One downside to a home equity loan is you may not need all the money right away, yet you’re borrowing it all anyway. With a traditional HELOC, you can draw only what you need over time.

So if you have an immediate need, you pull out X amount of cash at that time, as opposed to paying interest on it even when it’s just sitting there.

The downside to a HELOC is that it has a variable rate tied to prime, so you don’t get the security of a fixed interest rate.

Figure’s rate is fixed, even though it’s tied to prime, though rates can vary if you take additional draws and the prime rate has gone up or down since origination.

The gotcha with Figure is that the origination fee is based on the initial draw, which can be quite large depending on your chosen loan amount.

So you’d really only want to take out what you need today, not what you might need. This differs from HELOCs, which are often opened just as an emergency credit line, and may never be touched.

Ultimately, you probably want to compare Figure’s product to other home equity loans because you may never actually use the additional draw feature.

If you can find a home equity loan with no origination fee and a low, fixed interest rate, it may be more competitive.

Figure Home Equity Line Key Facts

  • Loan amounts from $15,000 to $150,000
  • Available on single-family homes and townhouses
  • Property can be primary residence, second home, or investment property
  • Minimum credit score is 600
  • Maximum LTV is 95%
  • Loan terms of 5, 10, 15, and 30 years
  • Only fee is an origination charge of 0%-4.99% of initial draw
  • No annual fee, prepayment penalty, or early closure fee
  • Discount for using AutoPay to make monthly payments
  • Figure has a 4.8/5 Trustpilot rating

Figure Now Offers Mortgage Refinances Too

Figure has since expanded into mortgage refinances as well, offering conventional financing on single-family homes and townhomes.

The property has to be owner-occupied at the moment, though that may change in the future.

The minimum FICO score accepted is 640, the max LTV is 80%, and the loan amount must be at or below the conforming loan limit for your county.

They only offer a 30-year fixed product currently, but you can take cash out up to $500,000.

Like their home equity product, it’s a 100% digital application that they say can be completed in around 10 minutes thanks to automated income and asset verification.

In terms of cost, they charge a 1% loan origination fee, which is common, though not all mortgage lenders charge such as fee.

Where Is Figure Currently Available?

At the moment, you can use Figure in most states, but there are still a few locations where they’ve yet to break ground.

For Figure home equity lines, the following 38 states (plus Washington D.C.) are live: AL, AR, AZ, CA, CO, CT, DC, FL, GA, ID, IL, IN, KS, LA, MA, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, OH, OK, OR, PA, RI, SD, TN, VA, WA, WI, WY.

While they promise more states to come, they’re missing Alaska, Delaware, Hawaii, Iowa, Kentucky, Maryland, New York, South Carolina, Texas, Utah, Vermont, and West Virginia.

When it comes to mortgage refinances, they’re live in 32 states, including: AK, AL, AZ, CA, DE, FL, GA, IA, ID, IN, KS, KY, LA, MA, MI, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, OH, PA, SD, TN, WA, WI, WV.

States that are missing include Arkansas, Colorado, Connecticut, Hawaii, Illinois, Maine, Maryland, Minnesota, New York, Oklahoma, Oregon, Rhode Island, South Carolina, Texas, Utah, Vermont, Virginia, Wyoming, and the District of Columbia.


12 Reasons Today’s Housing Market Is Not the Great Recession All Over Again

Posted on April 27th, 2020

While it’s becoming easier to compare the housing bust that sparked the Great Recession with today’s uncertain climate, the two just aren’t the same.

You’re probably going to see lots of articles warning of the next housing crash, claiming homeowners will be unable to pay their mortgages and forced to sell due to COVID-19.

But those opinions may ignore a lot of real statistics that paint an entirely different picture.

I used actual numbers from the latest Black Knight Mortgage Monitor report for February 2020 to illustrate.

Greater Share of Homeowners with 10% or More in Equity

then vs. now

First off, today’s homeowners are flush with home equity. In 2007, 14.5% of homeowners had 10% or less in equity. Today, just 6.6% have less than 10% equity.

This is due to several years of strong appreciation coupled with deleveraging.

In other words, not tapping equity via a HELOC or a cash out refinance, while also paying down debt via regular principal and interest payments.

During the early 2000s, homeowners were serially refinancing their homes while also making interest-only payments.

This meant they were overleveraging themselves and often getting into loans they couldn’t actually afford due to lax underwriting standards.

Loan-to-Value Ratios (LTVs) Are Lower Today

To that same point, today’s loan-to-value ratios (LTVs) are a lot lower than they were a decade or so ago thanks to more prudent underwriting guidelines.

The total market combined LTV (CLTV), which includes second mortgages, was 57.4% in 2007, and just 52.3% today.

The average CLTV was 61.83% back then, and just 53.31% today. Again, this shows many homeowners have lots of equity, as opposed to a massive mortgage on an overpriced property.

Simply put, equity means options, and vice versa. Even if borrowers struggle to make mortgage payments, the equity cushion provides better exits like a normal home sale as opposed to a short sale.

It also disincentivizes things like strategic default, where homeowners voluntarily walk away from their “worthless homes.”

Average DTI Ratios Are Also Lower

In terms of borrower capacity to repay, debt-to-income ratios (DTIs) are also lower today than they were in 2007.

While the average DTI at origination was 34.5% back then, it’s currently 33.5%. You might say it’s not much different.

But consider this – how many loans were actually properly underwritten back then? How many were stated income, effectively making the DTI measure useless?

The answer is most loans relied on stated income back then, while today’s DTI ratios are driven by real tax returns, pay stubs, and so on.

Borrower Credit Scores Are Higher, Delinquency Rate Lower

Then we’ve got credit, which is also better than it was leading into the Great Recession.

In 2007, the average original credit score was 708, compared to 736 today. And the average current credit score is 713, much lower than the 747 today.

While credit score isn’t everything, combined with more homeowner equity and better quality mortgages means lower defaults.

And we’re seeing that, with the mortgage delinquency rate 4.92% in 2007 compared to 3.28% today.

Again, you can thank properly underwritten mortgages for that, and a homeowner’s desire to protect the equity they’ve accrued.

Payment-to-Income Ratios Are Much Lower

Part of it just has to do with affordability, or the payment-to-income ratio.

It’s “a measure of how well home prices are supported by current incomes and interest rates,” and is much stronger than in years past.

In 2007 it stood at 31.8%, and today just 20.9%, a testament to how affordable homes are despite prices being nominally high.

Remember, you have to factor in inflation between now and then, along with higher wages, lower mortgage rates, and so on.

While the home may cost more than it did at the subprime peak, it’s actually cheaper for the reasons mentioned.

And again, a borrower’s income is actually verified today, as opposed to them simply stating that they made X amount per month.

Much Less Subprime Lending Today

While credit profiles are mostly better today than they were, subprime lending still exists today.

In the mortgage industry, it’s defined as a sub-620 FICO score, which is all you need to get an FHA loan or a VA loan.

However, the number of active subprime loans in 2007 was a whopping 5.1 million. Today, it’s less than two million.

To make matters better, these homeowners generally have more equity and a boring old 30-year fixed as opposed to some exotic mortgage.

Fewer Adjustable-Rate Mortgages and Option ARMs

Speaking of mortgage product, the number of active adjustable-rate mortgages is nowhere close to what it was in 2007.

Entering the Great Recession, there were a staggering 12,890,000 ARMs in circulation. Today, just 3.2 million.

Additionally, 4.95 million of those 2007 ARMs were scheduled to reset (higher) within three years.

Just 320,000 of today’s ARMs are scheduled to reset in three years. These borrowers also have fantastic options to refinance to a lower or comparable fixed-rate mortgage.

Then there were the option ARMs, which numbered 2,230,000 in 2007. Those are/were truly toxic mortgages that total just 320,000 today.

So to summarize, today’s homeowners have more equity, higher FICO scores, lower DTI ratios, properly-underwritten loans, and mostly fixed-rate mortgages with interest rates at/near record lows.

Throw in the fact that housing inventory is at its lowest point in years and it’s hard to compare then to now, even with COVID-19 beginning to make us question everything.


Home Prices vs. Gas Prices

Last updated on August 27th, 2018

With mortgage rates hitting 2015 highs last week, one might worry that the housing recovery will lose steam.

The 30-year fixed climbed to 4.08% per the latest survey from Freddie Mac, up roughly half a percentage point from the lowest levels seen earlier this year.

Clearly this reduces home buying affordability, and could make it more difficult to both buy and sell a home.

But as I’ve mentioned before, if you can’t afford a home you’re interested in thanks to an interest rate fluctuation, you might want to reassess the entire decision.

The good news is that there doesn’t seem to be a strong correlation between homes prices and mortgage rates.

In other words, just because rates rise doesn’t mean home prices will go down or stop going up. There’s actually data to support this.

Should We Look at Gas Prices Instead?

Perhaps a better indicator of home prices is what you pay at the pump, as evidenced by a recent study from Florida Atlantic University and Longwood University.

The collaborative effort, which used data spanning over 10 years, found that for every $1 decrease in gas prices, the average selling price of a home climbed by 2.4%.

That’s about $4,000 more per sold property included in the study.

Additionally, homes seem to sell more quickly when gas prices are low. Again, for that $1 per gallon decrease in gasoline price, the average time to sell a property falls by 25 days.

There’s also a better chance of closing a sale when gas prices are lower. Indeed, that same $1 decrease was also shown to increase a seller’s chances of closing the sale by about 20 percent.

So if you want homes to fly off the shelves at higher prices, lower the price of gas, not interest rates.

If you’re wondering why gas prices matter, just consider consumer confidence.

When prices at the pump are lower, consumers have more disposable income, which equates to a larger pool of prospective home buyers.

That larger pool of buyers means a home has a better chance of selling and at a higher price.

Bennie D. Waller, Ph.D., professor of finance and real estate and director of the Center for Financial Responsibility at Longwood University, also noted that the effort put forth by the listing broker increases as gas prices fall.

The idea being that they have more money to spend on marketing a home, and maybe it’s cheaper to drive clients around town.

Over the past year, gas prices have fallen about $1 per gallon despite a recent uptick during the past two months, according to the American Automobile Association (AAA).

Gas prices this summer are also expected to be the lowest they’ve been since 2009.

Don’t Rely on Gas Prices to Determine Housing Affordability

Interestingly, gas prices are very volatile and certainly not locked in. We don’t prepay for gas.

So consumers may think they’re better off for a few months while shopping for a home but if and when gas prices rise that supposed benefit quickly disappears.

You can almost liken it to an adjustable-rate mortgage, which may start at a low interest rate but eventually adjusts higher and could land a borrower in a home they can’t really afford.

That’s the strange thing about the data. A low fixed interest rate truly matters long-term since it’s what you’ll be paying for years to come, whereas low gas prices can be very short-lived and not really that beneficial.

And let’s face it; gas prices are never going to stay put so choosing to buy a home on that basis isn’t very wise.

But this might tell us when it’s a better time to sell your home, knowing there are more anxious buyers out there willing to pay top dollar.

Perhaps you can even snap up a relative bargain when gas prices are high.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.


Is Now the Time to Pull Cash Out of Your Home and Buy Stocks?

Last updated on March 24th, 2020

There’s been lots of chatter around Wall Street that this could be an unprecedented time to buy stocks on the cheap, given the market carnage related to the coronavirus.

One asset manager, Ricky Sandler of Eminence Capital, has even gone as far as to recommend that you refinance your mortgage and use the proceeds to purchase stocks.

Is this a good idea, a bad idea, or a reckless idea? Well, that depends.

The Dow Is Now Sub-20K

A month ago, the Dow was looking like it was about hit 30,000, which would have been cause for celebration, and the unveiling of new baseball caps with “Dow 30,000” emblazoned on the front.

Instead, we’re now below 20,000 as of the time of this writing, thanks to another massive drop this morning. Does anyone have those old hats lying around?

For reference, the Dow first surpassed 20,000 in January 2017, so we’ve basically just erased three years of gains in the matter of a month.

For the contrarians, this is an exciting development. An opportunity to buy equities at 2017 prices.

But who knows what the future has in store. Are stocks going to crumble even more in the short-term?

While some are calling the selloff overdone, we are living in extraordinary times. When was the last time you remember the world effectively shutting down?

The last time nations across the globe closed their borders? The last time the NBA, NHL, MLB, world soccer, and virtually all movies, concerts, and restaurants came to a halt?

Simply put, this is a big deal, and the economic ramifications are going to be tremendous. We are in uncharted territory.

Extreme Fear Is Ruling the Moment

fear greed index

Currently, we are living in Extreme Fear, based on the Fear & Greed Index. That’s as bad as it gets for stocks.

It was previously just a “Fear” rating back on February 27th, before things got even worse.

CNN defines Extreme Fear as a time when the number of stocks hitting 52-week lows exceeds those hitting highs and is at the lower end of its range.

Again, for contrarians, this probably sounds pretty appetizing. If everyone is selling, there’s probably an opportunity to buck the trend and buy some quality stocks at a discount.

But there’s also the fear of catching a falling knife.

Ultimately, these market movements can take a long time to play out, much longer than we anticipate.

Just think about the longest bull run in history, which began in early 2009 and abruptly ended with the coronavirus last week.

No one expected it to go on as long as it did, yet the market kept chugging higher and higher until something unforeseen stopped it in its tracks.

Market Corrections Don’t Tend to Last Very Long


Now some good news and an argument to apply for a cash out refinance so you can get in on the action.

Most stock market corrections, defined as a drop of 10% or more, only last for a short period of time. And the market always goes higher over time.

So one could argue that it’s virtually a no-brainer to invest when the Dow is at 20k if it was previously close to 30k.

Per Yardeni Research, there have been 36 corrections in the S&P 500 since 1950, with the worst being a 57% drop during the Great Recession.

And the average correction time, which is peak to trough, is roughly 196 calendar days. The longest was 929 days in 2000-2002, and the shortest 13 days in 2018.

The Great Recession correction lasted 517 days, which while long, doesn’t seem too bad given the circumstances.

The current correction has the S&P down around 30%, and there’s no sign it’s going to turn around at the moment.

Given the large decline, with more possibly to come, it could take quite a bit of time for stocks to bottom.

But they will eventually bottom and reverse course, it’s just a matter of when.

Best Not to Time the Market

Instead of selling all your stocks in a panic, it’s generally best not to do anything. The old adage about timing the market is true, it’s basically impossible.

And if you don’t touch anything, you haven’t really lost anything. It’s all a paper loss (or gain) until you actually sell.

However, you can add to your position(s) when you feel there’s an opportunity.

It’s just difficult to do so when you don’t have a lot of cash on hand, or if you need to deploy that cash toward your monthly mortgage payment and everyday bills instead.

That’s where a cash out refinance could come in handy, though the major caveat here is you’d be borrowing against your home.

So first you need to be able to afford the higher mortgage payment associated with a larger loan balance, and second, you’d have to be comfortable making such a move in the face of Extreme Fear.

For those thinking a HELOC could work, there are two issues that come to mind.

First, they are tied to the prime rate, which is adjustable and will likely increase over time as the stock market rises.

Secondly, in times of crisis, it’s not unheard of for mortgage lenders to freeze credit lines, so if you attempt to open a line and save it for a rainy day, it might get frozen along the way.

The cash-out argument makes sense though – with mortgage rates close to all-time lows, and stocks currently well off their all-time highs, it could be a recipe for some big gains.

Just imagine if those magical 0% mortgage rates were actually real!

But as the chart above shows, it may take some time for things to turn around, especially now with the world facing its most unique crisis in modern history.

Read more: Two Reasons Not to Refinance Your Mortgage Right Now


The Federal Reserve Has Swooped In to Save Mortgage Rates

Last updated on March 24th, 2020

In light of the ongoing coronavirus outbreak, which were the Federal Reserve’s very own words, the Committee took bold action to lower the target range for the federal funds rate to 0% to 0.25%.

That’s a full percentage point lower than the 1% to 1.25% it had been previously. And comes on top of the half-point cut executed just over two weeks ago.

As such, the prime rate has fallen from 4.75% to 3.25%. The prime rate directly affects consumers via things like credit card interest rates and home equity lines of credit (HELOC)s because they’re typically tied to that index.

For homeowners with HELOCs, their interest rates will adjust down 1.50%, which will provide meaningful monthly payment relief.

But what about first-lien mortgage rates, which hit record lows a couple weeks ago, then shot back higher once the market was flooded with mortgage-backed securities (MBS).

Well, the Fed also addressed that issue by effectively starting a new round of quantitative easing, which will probably be known as “QE4.”

Fed Pledges to Buy Agency MBS to Lower Mortgage Rates (QE4)

  • Fed said coronavirus outbreak has hurt communities and disrupted economic activity in the United States
  • To promote maximum employment and price stability it has lowered federal funds rate to 0% to 0.25% range
  • Also announced it will increase its holdings of Treasury securities by at least $500 billion and holdings of agency mortgage-backed securities by at least $200 billion
  • This will lead to lower mortgage rates for homeowners

The federal funds rate doesn’t directly affect consumer mortgage rates, you aren’t getting a 0% mortgage rate.

However, the Fed’s emergency announcement to buy agency MBS does.

First, here’s what they’re doing to combat a recession and ease global markets:

“To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion,” the FOMC statement read.

“The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

In short, the Fed has come to the rescue of the mortgage market, which didn’t seem like it needed rescuing until excessive mortgage demand worked against consumers.

Because there was a flood of mortgage applications, and not enough demand from investors of mortgage-backed securities, lenders were basically forced to raise mortgage rates to limit supply.

But now that the Fed has pledged to purchase at least $200 billion in agency MBS, and reinvest payments into agency MBS, lenders shouldn’t have trouble fetching a higher price for the home loans they sell.

As such, they’ll be able to decrease mortgage rates and perhaps we’ll see those record lows again.

How Low Will Mortgage Rates Go with QE4 in Place?

  • 30-year fixed mortgage rates were averaging around 3.75%-4% before the news hit
  • When the Fed launched QE3 in September 2012 it led to record low mortgage rates
  • At that time the 30-year fixed fell from around 3.55% to 3.31%
  • Expect mortgage rates to return to the low 3s and perhaps to new all-time lows over time

So we know mortgage lenders (and homeowners) are going to see some relief from QE4. The next logical question is how much will mortgage rates actually fall.

As noted, interest rates were suppressed by an oversupply, but now that a whale of a buyer has pledged to buy hundreds of billions in MBS, we should see interest rates fall again.

That’s great news for consumers, namely those looking to refinance mortgages or purchase a new home.

The bad news is mortgage rates jumped more than half a percentage point last week as a result of the oversupply, and thus might not hit those all-time lows again. And even if they do, it could take some time to do so.

When the Fed launched QE3 back in September 2012, the 30-year fixed averaged roughly 3.55%. During the weeks and months that followed, rates fell about 25 basis points.

In fact, the prior record low for the 30-year fixed was 3.31%, recorded during the week ended November 21st, 2012.

We’re in similar territory now, with mortgage rates pretty close to those September 2012 levels.

So we might see rates move in familiar fashion, from around 3.75% to 3.375% and on down to 3.25% if all goes according to plan.

Whether they hit 3% or even dip into the high 2s remains to be seen, but given the Fed’s pledge to buy billions in MBS, coupled with the 10-year bond yield below 1%, it’s certainly possible.

I just wouldn’t expect lenders to go too crazy in lowering rates at the moment, given they still have a ton of demand and lots of applications in their pipelines to process.

Still, it’s huge news because it means lenders have certainty now to originate ultra-cheap mortgages without fear of being stuck holding the bag.

But it might take some time for rates to trickle down and reach record lows again. Again, hang tight here, as I mentioned before.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.


Will Forbearance Prevent You from Getting a Mortgage in the Future?

Last updated on May 19th, 2020

Since the CARES Act rolled out in early April, more than four million Americans have reportedly put their mortgage payments on hold for up to 12 months.

The massive numbers taking part can be attributed to the widespread fallout from the coronavirus epidemic (COVID-19), and also the ease at which a homeowner can request assistance, with not much more than a letter or simple request to their loan servicer without proof.

It’s expected that many more borrowers will request mortgage forbearance in the month of May and beyond, as evidenced by a recent survey from Bankrate.

Update: There Will Be a 3-Month Waiting Period to Get a Mortgage After Forbearance

Need Help, But Not Yet Asking for It

need help

Apparently, many Americans are concerned about making mortgage payments in light of possible job losses or income curtailments, but most haven’t reached out for help yet.

Some 70% of Millennials said they were concerned about their ability to make mortgage payments over the next three months, but only 60% said they have contacted their lender.

Meanwhile, 56% of Gen Xers are concerned, but a mere 29% have reached out to their lender or loan servicer.

It’s even worse for Baby Boomers, with 43% concerned, and only 17% asking for help.

As to why, some said they didn’t know it was an option, or simply haven’t gotten around to it, or are waiting for lenders to reach out to them (good luck!)

Others cited unspecified reasons or said they came up with their own solution.

For me, this proves that homeowners are reticent to ask for help, possibly because they think it’ll count against them somehow, even though mortgage forbearance isn’t supposed to harm credit scores or result in delinquencies.

Mortgage Lenders Will Know You Requested Forbearance

  • Lenders told not to report loans in forbearance as delinquent to credit bureaus
  • But loan servicers and lenders are still flagging accounts on credit reports
  • Will these borrowers be considered “late” once the forbearance ends?
  • Could presence of forbearance on credit reports prevent borrowers from getting another mortgage?

My initial thoughts are it shouldn’t count against you, but that’s not always how it works, especially if a private company plays by its own rules.

After housing blew up a decade ago, the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) were rolled out to help struggling homeowners.

While these initiatives provided relatively immediate relief to homeowners, they also resulted in various waiting periods to get subsequent mortgages.

So a homeowner who opted to receive assistance may have had to wait a year or two to get another mortgage.

These waiting periods were even longer (up to four years) if the borrower received a principal reduction that resulted in them owing less than originally agreed.

But shorter if there were extenuating circumstances, of which there will be for just about everyone this time around.

The question is will they use the past as a model for the future? Things were a bit different back then because there was perhaps some borrower fault, and basically none today.

While you could argue that all homeowners should have reserves saved up for moments like these, they often aren’t required by Fannie Mae, Freddie Mac, the VA, or the FHA.

So you can’t really blame a homeowner impacted by an unforeseen virus to continue making mortgage payments. Nor can you blame them for accepting the assistance you’re offering.

In other words, I can’t see Fannie, Freddie, the FHA, or the VA disallowing a mortgage refinance or a new purchase loan if they extended the forbearance in the first place.

In the case of a refinance, mortgage lenders (or the investors) would presumably receive the missed payment amounts via the payoff to make them whole.

Will Mortgage Forbearance Count Against You?

  • Just because your mortgage isn’t late doesn’t mean it won’t hurt you
  • Lenders may impose waiting periods for borrowers post-forbearance
  • They will likely scrutinize loan files if you requested forbearance in the past
  • It will be key to show them the event is behind you if you want another mortgage

Sure, you’re not technically behind on the mortgage, per the CARES Act and other forbearance programs, but lenders will know that you entered into a mortgage forbearance plan. It’ll be noted on your credit report.

While it might not be a formal delinquency or late mortgage payment, it’ll be visible to creditors when you apply for a new credit card, auto loan, or a mortgage.

It’s a notable event from a credit perspective, and thus will be shared, though it shouldn’t officially count against you.

In other words, its presence doesn’t necessarily mean you won’t be able to refinance or get another mortgage on a different property, especially if it wasn’t your fault.

However, you’re going to have to qualify for the mortgage, like you usually would in normal times.

That might be the dividing line, not so much a waiting period or a flat-out denial just because you took advantage of widespread mortgage forbearance.

Note that guidelines will vary by bank, especially if it’s a jumbo loan or portfolio loan that isn’t backed by Fannie Mae or Freddie Mac, or a government agency like the FHA or VA.

Regardless, it’ll be very important to stay current on mortgage payments post-forbearance. The same goes for any other accounts that show up on your credit report.

An underwriter will dig into your financials to determine this to ensure it’s an isolated incident and really behind you.

Ultimately, it might hinge on the borrower showing that they are back on their feet and that it was a blip related to COVID-19 and not due to their own personal financial missteps or issues.

Like those loan mods in the past, it’ll be crucial that the borrower make on-time payments once forbearance ends to ensure they qualify for a new mortgage without further delays.

Those who still need assistance post-forbearance, via a loan modification or further forbearance, will likely have trouble qualifying for another mortgage.

But that’s pretty obvious – if you can’t pay your existing home loan, why would a lender give you another one?

Read more: Will home prices go up or down due to COVID-19?