May 19, 2020
Home construction fell sharply in April, in line with expectations. The FHFA offered more certainty regarding the prospects of borrowers with government-backed loans in forbearance. The fate of those borrowers with privately-held loans remains unclear.
Home construction activity was way down in April
- April housing starts fell 30.2% from March, the largest one-month decline on record.
- Housing permits fell 20.8% on the month.
Federal Housing Finance Agency offers more clarity to borrowers
- In their third major policy announcement since last week, the FHFA stated borrowers with loans in forbearance are eligible to obtain a new mortgage.
- Criteria based on consistent monthly payments must be met in order to qualify.
Repayment plans for privately-held mortgages in forbearance remain unclear
- More than $1 trillion in investment grade debt has been issued so far in 2020, compared to $1.14 trillion for the whole of 2019.
- About 30% of all mortgages are held by private banks or investors, and not eligible for government assistance.
The monumental decline in home construction activity in April was widely expected, but the decline is breathtaking nevertheless - the monthly decline in housing starts was easily the largest on record. But with last month now officially in the books, the million-dollar question is what happens next? While builder confidence plummeted in the early days of the crisis, it has slowly begun to climb back as builders assess a market that may not look as bad to them as it first seemed. Even in a market in which many buyers have been sidelined, the supply of homes for sale remains woefully low – and the idea of a brand new, never-lived-in home may prove extra alluring these days to safety-conscious buyers that can afford the premium on new construction. And mortgage interest rates sitting at near-record lows could make that somewhat larger price tag a bit easier to swallow for certain buyers. Residential construction has been deemed an essential service in many areas, allowing builders to keep projects going and be ready to meet demand once it comes back more fully. A quick return to anything close to "normal" is a ways off, but with other housing metrics indicating the worst may be behind us, builders are already looking to do their part to address the ongoing inventory shortage and capitalize on relatively forgiving homebuying conditions.
The FHFA announced that homeowners with mortgages in forbearance will still be eligible to refinance or qualify for a new home loan once the crisis ends, so long as certain criteria are met. While the language in the announcement is somewhat ambiguous, it appears that so long as a borrower is either making mortgage payments while in forbearance or has made three consecutive months' worth of payments after the relief period has ended, then they are eligible to obtain a new mortgage. The news is sure to be welcomed by borrowers concerned about their options once the assistance on their mortgage runs out, and eager to capitalize on low mortgage rates once they're in the position to do so. The news was the latest proactive step taken by the FHFA, which also recently announced a payment deferral option for under-forbearance borrowers and the extension of a moratorium on evictions and foreclosures. Taken together, the three policy announcements should help buoy borrower confidence and offer clarity into how the mortgage market is going to function in the coming months.
The FHFA announcement was welcome news for the 70% or so of mortgage borrowers whose loans are backed by government entities, but the situation remains far less certain for the ~15 million borrowers with mortgages owned by private banks or other investors. While some of these borrowers were offered similar-sounding forbearance programs, these individual programs lack the consistency and clarity of the government offerings, leaving borrowers more exposed and less aware of their options. While forbearance programs offered through the federal government do not require lump sum payments nor accelerated payback plans once forbearance ends, reports have surfaced that some private loan issuers are demanding these kinds of expedited repayments from borrowers granted temporary assistance. Loan modifications are reportedly also available from some of these issuers, but that is a far more complicated process that might also involve new requirements being tacked onto the restructured loan. The lack of consistency surrounding these policies is a concern for the broader mortgage market and introduces a higher risk of defaults and/or foreclosures down the road.
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