Zillow Market Pulse: April 8, 2020

April 8, 2020

The coronavirus outbreak continues to negatively impact mortgage application activity, particularly in states with high case counts. A large number of renters failed to make their April payment last week. And discussions around still-unresolved issues facing mortgage servicers heated up.

• Purchase mortgage application activity continues its sharp slide

  • In the week ending April 3, the Mortgage Bankers Association Purchase Index fell 12% from the week before and 33% from the same week a year ago.
  • Overall mortgage application activity fell 17.9% week-over-week.

• Evidence of missed monthly payments starting to mount

  • Almost a third of renters missed their monthly rent payments last week, according to a recent study, up from 18% in April 2019.
  • The data reflects only "investment-grade" rental apartment properties, and do not include tenants in single-family rentals and public housing.

• War of words around mortgage servicer dilemma escalates

  • In the last two days, the Mortgage Bankers Association and Federal Housing Finance Agency have each strongly argued their case for and against, respectively, additional relief for mortgage servicers.
  • So far, no additional funding has been agreed upon, despite the estimated ~$30 billion risk to the mortgage industry.

So what?

A week after the first due date for monthly rent and mortgage payments since the start of the widespread U.S. COVID-19 outbreak, evidence is emerging as to the extent of missed payments. It was recently reported that about 2.7% of mortgages were under forbearance, with many more likely to turn to that status in coming days and weeks as bottlenecks in the application process clear up. Today, the National Multifamily Housing Council reported that 31% of renters did not make their April rent payment last week, up from 18% in April 2019. The study was based on 13.4 million "investment-grade" rental apartment properties, and does not provide information on payments made by tenants living in public housing units or rented single-family homes — so expect this number to climb in the coming weeks. Locally enacted anti-eviction and other tenant protection measures can offer some relief to tenants, but also create potential challenges for landlords whose income streams are suddenly at risk. Some federal measures have been aimed at protecting certain landlords – specifically those with government-guaranteed mortgages – allowing them to defer their own monthly payments. But fewer than one-third of U.S. rental units are federally financed, according to the Urban Institute, leaving a large portion of the rental market unprotected.

For the third week in a row, the seasonally adjusted measure of purchase application activity — typically an early indicator of home sales activity 4-6 weeks later — fell on an annual basis, and now sits at its lowest level since 2015. The pullback was especially acute in New York, California and Washington, three states hit early by the outbreak. Non-seasonally adjusted activity in Washington fell 38% in the last week, and now sits 59.9% below where it was last year. California's for-purchase activity is 47.5% below its levels from last year, while New York's is down 55.4%. And at the same time as applications themselves are falling, so too are the loan sizes being sought by those borrowers that do apply: After rising for 58 straight weeks, the average loan size on for-purchase loans fell for the second week in a row and was down 6% year-over-year, the steepest annual decline since 2011. Some possible reasons for the decline in loan sizes are tighter lending conditions in the market for jumbo loans and/or higher down payment requirements from more-selective lenders.

The mortgage industry is facing a slew of well-documented challenges in the wake of the COVID-19 outbreak — some expected, some not. Perhaps the most vexing is the risk to mortgage servicers, who remain on the hook for monthly payments to investors, even if the monthly payments they'd normally receive from borrowers are postponed. Servicers argue that these constraints pose a risk to both their businesses and the industry itself, potentially limiting lending volume, weakening the stream of payments to investors and potentially posing an existential threat to many smaller outfits without the cash reserves to withstand a multi-month sharp decline in revenue. The Mortgage Bankers Association has asked repeatedly for federal financial support for servicers, but so far none has come, and a war of words is ramping up. Representatives from the FHFA (which oversees mortgage securitizing giants Fannie Mae and Freddie Mac, among other housing entities) and the MBA (a trade group representing the mortgage industry) have each strongly voiced their cases against and for additional support to servicers, respectively, in the last two days. It appears a solution is still a ways off, but the risks to servicers persist. A baseline estimate from the Urban Institute suggests 12% of borrowers could be in forbearance for six months, costing servicers an estimated $33 billion — and the study's worst-case scenario projects those numbers to double.

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