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How mortgage relief measures are helping homeowners amid coronavirus

Former Fannie Mae Executive and SitusAMC Managing Director Tim Rood joins Yahoo Finance’s Seana Smith to discuss how homeowners should use mortgage relief measures amid the coronavirus outbreak.

Video Transcript

SEANNA SMITH: Welcome back to Yahoo Finance. March it started out strong for the housing market. But by the third week of the month, there were some signs out there that the Coronavirus was disrupting the industry's momentum. So in a new report out by realtor.com, and it found that the number of newly listed properties dropped by 13% in the third week of March, and dropped by 34% by the final weeks.

Here to talk more about this and the implications that could have for the housing sector, we have Tim Rood, a former Fannie Mae executive and also SitusAMC Managing Director. And Tim, thanks so much for taking the time this afternoon. There's lots of talk here, just in terms of how Coronavirus is already impacting the housing sector. But I first want to start with the fact that the fundamentals for the housing, for housing leading into this crisis, were relatively strong. It was pretty bullish. Where do we stand at this point?

TIM ROOD: Yeah, Hi, Seanna. No, I would say it was very bullish going into the crisis. Up till the end of February, every proxy you would have with the health of the housing market-- both residential, multifamily, new construction, existing homes-- they were all very bullish. And they were supported, in large part, by huge tailwinds coming from the millennial population that was coming of age, low interest rates. Everything was in its favor.

Right now, what you're looking at is, of course, is a huge unknown. If you're in the market to buy a house, of course, you know, it's a confidence game not in the pejorative sense, right? But it's not only about affordability. But you also to make sure that you've got great confidence in terms of your ability to continue to make the payment, and your prospects for employment in the future. Those things have all really hit the skids. Nobody really knows how to kind of anticipate how long or how deep this crisis is going to be. And as a result, you're going to see activity on the refinance side, as the Fed has come in and driven interest rates down. But there's a good healthy pause on the purchase side [INAUDIBLE].

SEANNA SMITH: Tim, the degree of the disruptions? Because I know you're saying at this point, it's hard. To tell but how do you think that will vary across the country?

TIM ROOD: Well it's taken a couple different forms. If you think about-- the Cares Act had a provision in there for, one, foreclosure prevention a moratorium for 60 days. The other one had a large scale forbearance program. And the impact of that is, it was a very pleasant surprise for homeowners, who were anxious about their prospects for being able to make their mortgage payments.

However, it was less of a welcome surprise for the guys who actually have to advance the payments on behalf of the borrowers when they don't actually make those payments. And those are largely independent mortgage companies that are servicing most of these government backed mortgages. And as a result, it's going to impact the price of credit and the access to credit. Because there was never any facility-- heck, the independent mortgage companies weren't even consulted during the drafting of the provision in the Cares Act that requires them to advance these payments on behalf of the borrowers.

So they were unprepared for that, and also the liquidity requirements for advancing 20%, 30% of the market, which is what we're at risk of looking at, is overwhelming. It's 6 to 20 times higher than the statutory requirements that those organizations have of these independent mortgage companies. So that will flow through, in terms of both the cost of capital and the access to capital, as mortgage companies, originators, servicers, are finding themselves dealing with the financial and operational demands of a high refinance market, now with an influx of borrower calls, looking to investigate whether or not they actually qualify for forbearance.

SEANNA SMITH: Tim, how worrisome, is that just in terms of the ability to handle this type of situation, the number of forbearance claims that are being taken out at this point? Do you think that the stimulus package could create-- I don't want to say chaos, but severely disrupt the mortgage industry, just in terms of its ability to follow through and a lot of these claims?

TIM ROOD: Yeah, I'd say it already has, unfortunately. As a result of them having no liquidity facility for these independent mortgage companies that are having to advance what looks to be able to read of maybe $10 billion a month, depending on the uptick rate? In nine months, you're looking at $90, $100 billion of advances? Without that liquidity facility, then you're putting at great risk these companies that really, through no fault of their own, are really trying to implement the government's public policy. They are, in fact, the tools of public policy.

So it's had a huge impact on those organizations. And we're going to wait and see exactly how that plays out. I think the other opportunity, or the other challenge is, any loan that's not guaranteed by the federal government-- which, leading into the crisis, about 80% of the market was government backed. Now it's about 95% backed. The result of that is-- the reason that is, is because anything that doesn't have a government guarantee, including prime jumbos, or what they call non-QM loans, which ultimately have a variety of different proxies for credit worthiness and capacity that they use to document those things-- that market has shut down. So now you've taken all this extra capacity out of the marketplace.

And you've put the whole market on the back of the government. And now the government is relying on these independent mortgage companies, who because they don't have an advanced facility, looks-- I can't tell if it's Russian Roulette or if it's the Salem Witch Projects or something. But government seems to be content.

They'll see this play out. And if you lose some independents along the way, then I guess we'll figure that out when it happens. But the contagion risk of that, comes that the broader financial institution, is somewhere between New Century or Lehman Brothers. And I guess we're just going to have to wait and figure that out.

SEANNA SMITH: Tim, [INAUDIBLE] from that policy measures that we've seen put into place. And talk about what could be done, or maybe what would alleviate some of the stress that's happening in the housing market right now. And a lot of it has to do with the technology companies that are using technology in order to sell homes or list homes at this point. How effective do you think that is in a time like this? And how much pain do you think that would help alleviate from the sector?

TIM ROOD: Apparently, not much. No, those I buyer programs have gotten crucified. So they're not doing very well. In a robust market, I think that they had a place where they could pick off that the types of properties that people are so comfortable buying, right? It doesn't work very well. I mean, you think about real estate transactions. You know, there's markets where you really don't need a real estate agent. There's other markets where you desperately need a real estate agent. And the I buyers market, the ones that you're referring to are really in the more frothy markets, where you can do your research online, you can browse the properties online, and it's easy to make a determination, in terms of the value of those properties, and the trajectory of those values. In a harder market, you know, you're going to need the personal touch of a realtor. And I think that definitely puts a shadow on those businesses time being.

And you've seen those I buyers really retrench and pull from the market. And it's anybody's guess ultimately how long this time out is. It looks like most disasters, you compare this to a hurricane or some other natural disaster/ these things tend to go dark for the mortgage business and home sales for a period of months, weeks. In this case, it's really difficult to tell. And it's going to be a reflection of how strong the economy bounces back, how deep the employment, unemployment, recession is. And it'll be market to market.

You're seeing that in some of the states that have been hit the hardest. You've got Washington, California, New York, Illinois, Louisiana-- those markets, you can really see, in terms of a number of applications, a number of home sales, a number of listings, have all fallen off the face of earth.

SEANNA SMITH: All right. Tim Rood, lots of great stuff out there. Former Fannie Mae executive and SitusAMC managing director, thanks for joining us.

TIM ROOD: You bet.