Can You Break a Lease Because of COVID-19? What Renters Need To Know

break a rental contract

In this uncertain time of the novel coronavirus, many renters, eager to change their living situations, may consider breaking their lease. Some may be interested in moving from their city apartments and to less populated areas, while others may find themselves suddenly unemployed and forced to look for cheaper housing options.

But can you break a legal lease because of COVID-19?

Generally, it can be difficult and expensive to break a lease. Tenants are typically responsible for paying the rent until their lease is up—so if you’re three months into a one-year lease, you’d still have to pay rent for the remaining nine months.  And the same laws still hold right now: If you end a lease early, even in the era of COVID-19, you’re still responsible for your rent until the end date in your contract.

“It’s bad news for tenants these days,” says Craig Blackmon, a real estate lawyer based in Seattle. “Generally speaking, the pandemic does not relieve a tenant from having to pay rent, even if the tenant feels compelled to move out.”

That said, the coronavirus might make landlords more flexible on ending leases early than they may have been in the past. Here’s why—and how you can use this to your advantage.

What happens if you break a lease without a landlord’s permission

For starters: If you’re thinking of just stopping your rent payments and running for the hills without your landlord’s blessing, that’s certainly one way to break a lease. But be warned: Leaving your last place on bad terms could spell trouble when it comes to finding a new place, and it could severely affect your credit rating.

“Many landlords will want to contact prior landlords,” says Denise Supplee, a real estate agent and property manager in Philadelphia. “Whether tenants like it or not, tenant screening is available virtually. And if a renter breaks a lease without a landlord’s blessing, this will certainly not bring a positive reference.”

So if you want to break a lease early, it is important that you check with your landlord first.

Why COVID-19 might let you break a lease early

While you might be legally on the line for your rent until the end of your lease, landlords might be more flexible these days because many tenants can’t pay rent right now.

In the past, such tenants who couldn’t pay rent would be evicted—but COVID-19 has led to the CARES (Coronavirus Aid, Relief, and Economic Security) Act, which prevents landlords of certain residences nationwide from evicting tenants from March 27 to July 25, 2020—and perhaps beyond that. This means that for the time being, many tenants not paying rent can stay put.

“The CARES Act suspends evictions for any properties secured by federally backed mortgages,” says G. Brian Davis, director of education for SparkRental.com. “That includes conforming Fannie Mae and Freddie Mac mortgages, FHA loans, and VA loans.”

So if your landlord has such a loan, you’re safe. Plus, Davis adds, “it also suspends evictions for Section 8 landlords and those taking the Low-Income Housing Tax Credit.”

Even if your rental doesn’t fall into one of those categories, Davis says it’s a good idea to check with your city.

“Some cities and towns have also temporarily suspended evictions,” he adds. “Plus, many other jurisdictions have temporarily closed civil courts, preventing landlords from scheduling a rent court hearing.”

Bottom line: Having lost the threat of evictions, landlords may be more lenient about a whole lot of things, including rent due dates and breaking a lease, since the alternative may be that these tenants can otherwise just occupy the unit for free.

“If a tenant calls their landlord and explains that they lost their job and can’t pay rent and asks to move out early, landlords would be wise to let them out, given their inability to enforce evictions right now,” explains Davis. “The landlord can then sign a new lease agreement with an employed renter.”

And even if you can pay rent but just want to break your lease to find a cheaper or more remote apartment elsewhere, a landlord may still show more flexibility than usual rather than put up a fight. With so many now wishing they could end their lease quickly and more conveniently, Davis says that many landlords and tenants alike may find comfort in shorter-term lease agreements.

“It’s a time of great uncertainty, and in times of uncertainty it pays to stay as flexible as possible,” Davis says. “It goes for tenants facing an uncertain employment market, and it goes for landlords, too.”

So how should you approach breaking a lease?

If you’re ready to ask your landlord about breaking your lease, here’s what to do:

  • Be upfront about your situation, whether you’ve been laid off or just want to move. Since landlords may be getting skipped or late payments from many tenants, they may appreciate your being honest with them and willing to negotiate. If you can pay one more month’s rent but that’s it, say so and see what your landlord says. There may be a solution.
  • Even if your landlord won’t let you out of your lease early, try for a middle ground. “You could also try to negotiate a lower amount for early termination than the lease calls for,” says David Reiss, academic programs director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. “You could also forfeit your security deposit.”
  • Of course, you could always offer to try to find a new renter, or to sublet your place. While this could be a difficult task in this unpredictable time, however, you might get lucky. You never know until you ask around.
  • If your landlord does agree to new terms, get everything in writing and keep a copy for your records. Don’t trust any nonverbal agreements because, when push comes to shove, it’ll be the landlord’s word against yours. The last thing you want is to move out and end up with some legal trouble down the road.
  • Finally, ask for a letter of reference. Remember that finding a new lease may be difficult, especially if you’re currently unemployed. A good reference from your landlord could help you get into your next home.

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What Is a No-Fee Mortgage?

Real estate concept - businessman signs contract behind home architectural model

When you apply for a mortgage or refinance an existing mortgage, you want to secure the lowest interest rate possible. Any opportunity a borrower can exploit to shave dollars off the cost is a big win.

This explains the allure of no-fee mortgages. These home loans and their promise of doing away with pesky fees always sound appealing—a lack of lender fees or closing costs is sweet music to a borrower’s ears.

However, they come with their own set of pros and cons.

No-fee mortgages have experienced a renaissance given the current economic climate, according to Ralph DiBugnara, president of Home Qualified. “No-fee programs are popular among those looking to refinance … [and] first-time home buyers [have] also increased as far as interest” goes.

Be prepared for a higher interest rate

But nothing is truly free, and this maxim applies to no-fee mortgages as well. They almost always carry a higher interest rate.

“Over time, paying more interest will be significantly more expensive than paying fees upfront,” says DiBugnara. “If no-cost is the offer, the first question that should be asked is, ‘What is my rate if I pay the fees?’”

Randall Yates, CEO of The Lenders Network, breaks down the math.

“Closing costs are typically 2% to 5% of the loan amount,” he explains. “On a $200,000 loan, you can expect to pay approximately $7,500 in lender fees. Let’s say the interest rate is 4%, and a no-fee mortgage has a rate of 4.5%. [By securing a regular loan], you will save over $13,000 over the course of the loan.”

So while you’ll have saved $7,500 in the short term, over the long term you’ll wind up paying more due to a higher interest rate. Weigh it out with your financial situation.

Consider the life of the loan

And before you start calculating the money that you think you might save with a no-fee mortgage, consider your long-term financial strategy.

“No-fee mortgage options should only be used when a short-term loan is absolutely necessary. I don’t think it’s a good strategy for coping with COVID-19-related issues,” says Jack Choros of CPI Inflation Calculator.

A no-fee mortgage may be a smart tactic if you don’t plan to stay in one place for a long time or plan to refinance quickly.

“If I am looking to move in a year or two, or think rates might be lower and I might refinance again, then I want to minimize my costs,” says Matt Hackett, operations manager at EquityNow. But “if I think I am going to be in the loan for 10 years, then I want to pay more upfront for a lower rate.”

What additional fees should you be prepared to pay?

As with any large purchase, whether it’s a car or computer, there’s no flat “this is it” price. Hidden costs always lurk in the fine print.

“Most of the time, the cost for credit reports, recording fees, and flood-service fee are not included in a no-fee promise, but they are minimal,” says DiBugnara. “Also, the appraisal will always be paid by the consumer. They are considered a third-party vendor, and they have to be paid separately.”

“All other costs such as property taxes, home appraisal, homeowners insurance, and private mortgage insurance will all still be paid by the borrower,” adds Yates.

It’s important to ask what additional fees are required, as it varies from lender to lender, and state to state. The last thing you want is a huge surprise.

“Deposits that are required to set up your escrow account, such as flood insurance, homeowners insurance, and property taxes, are normally paid at closing,” says Jerry Elinger, mortgage production manager at Silverton Mortgage in Atlanta. “Most fees, however, will be able to be covered by rolling them into the cost of the loan or paying a higher interest rate.”

When does a no-fee mortgage make sense?

For borrowers who want to save cash right now, but don’t mind paying more over a long time frame, a no-fee mortgage could be the right fit.

“If your plan is long-term, it will almost always make more sense to pay the closing costs and take a lower rate,” says DiBugnara. “If your plan is short-term, then no closing costs and paying more interest over a short period of time will be more cost-effective.”

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Regulators ease restrictions on homeowners in coronavirus mortgage bailout program

  • Federal regulators have changed rules and cleared up some confusion about limits placed on the more than 4 million borrowers in the mortgage relief program the government rolled out to contend with the coronavirus’s economic onslaught.
  • Lending rules that were in place before the pandemic left borrowers with little clarity about how they could get future mortgages or refinance their loans.
  • Yet on Tuesday, the director of the Federal Housing Finance Agency announced that borrowers may now refinance or buy a home with a new mortgage if they have started making payments on their current mortgage again.

A sign advertising home mortgage services at a Bank of America branch in Manhattan Beach, Calif.

Federal regulators have changed rules and cleared up some confusion about limits placed on the more than 4 million borrowers in the mortgage relief program the government rolled out to contend with the coronavirus’s economic onslaught.

Lending rules that were in place before the pandemic left borrowers with little clarity about how they could get future mortgages or refinance their loans. Yet on Tuesday, the director of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, announced that borrowers may now refinance or buy a home with a new mortgage if they have begun to make payments on their current mortgage again.

They can do this if they’re in the forbearance program, or also if they have gotten out of it already. But they have to have made at least three months’ worth of payments. The previous guidelines had said borrowers must be current on their mortgage for at least a year.

“Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized,” said FHFA Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.”

There had been some confusion on the part of lenders and servicers as to when borrowers now current on their loans could get back into the market. In addition, some borrowers claimed they had been unknowingly put into the forbearance program just by calling to ask for information about it.

“We appreciate clear guidance from FHFA and feel these responsible parameters will allow lenders to serve well-qualified borrowers in their purchase of a new home,” said Debra Still, president and CEO of Pulte Mortgage, a division of one of the nation’s largest homebuilders.

The FHFA is also extending Fannie and Freddie’s ability to purchase single-family mortgages that are in forbearance. They can now buy forborne loans, with note dates on or before June 30, as long as they are delivered to the two by Aug. 31, and have only one missed mortgage payment. The previous policy was set to expire on May 31.

“These welcome moves ensure that homeowners who continue to make on-time payments – and those who have successfully exited forbearance – can benefit from near record-low mortgage rates,” said Bob Broeksmit, CEO of the Mortgage Bankers Association. “It also keeps the mortgage market functioning efficiently and helps ease current credit availability constraints.”

Borrowers may apply for mortgage forbearance with no proof of hardship, only declaring that they are unable to make their monthly payments. While the number of borrowers continues to increase, now with just more than 8% of all borrowers in forbearance, according to the MBA, the weekly volume of new applicants is shrinking.

Diana Olick

 

How to sell your home in the age of coronavirus

  • For the week ending March 9, new listings were down 29% annually, and the total supply of homes for sale was down 19%, according to Realtor.com.
  • As states reopen, new home listings are starting to pick up, along with open houses.
  • Strategies like employing virtual technology, staging and moving out are ways that can help land a buyer in the age of social distancing.

Not a lot of homeowners want to put their homes on the market in the midst of a pandemic, but some do need to move, and it’s not the worst time to sell. Demand for housing is still incredibly strong, despite the hit to the economy, and supply is at a record low.

For the week ending March 9, new listings were down 29% annually, and the total supply of homes for sale was down 19%, according to realtor.com. But now new listings, along with open houses, are starting to pick up as states reopen.

Selling a home is stressful enough, but selling in the age of social distancing may seem even worse, but it doesn’t have to be. Simple strategies can help.

First, staging the home to sell has never been more important, even if you’re not letting people in.

“You must double-down on every good practice they had prequarantine, and make sure the house is even more prepared, if anything, than it was when the majority of people would be visiting it actually versus virtually,” said Paul Legere, a real estate agent with The Joel Nelson Group in Washington, D.C.

Sellers should resist the urge to save on staging now and may even want to step it up. Virtual technology is a must, and some agents are now using the latest in 3-D touring, which allows buyers to move through the home on their own.

“As we headed into quarantine, we invested in a 3-D Matterport camera so that we can shoot our own virtual tours and not rely on scheduling a photographer,” said Legere.

Sellers should also make sure the agent they choose is willing to do personal, live virtual tours. Dana Rice, a real estate agent with Compass in Maryland, has been walking buyers through her listings over a smartphone or tablet so the buyers can ask questions in real time. Others are doing Facebook Live showings for groups.

“The whole virtual tour thing is not just hosting a Facebook Live, because nobody wants to sit through that,” said Rice. “So there are a few lessons to take from doing them over the past seven weeks: It has to be private enough for a buyer to join in without feeling exposed, but open enough that people can easily participate. And the host [agent] should have an assist from another person who is reading comments and making notes of questions.”

While not all sellers can move out of their homes before selling, it certainly helps today. That way buyers can tour the homes on their own. Homebuilders are definitely benefiting from the ability to open up their models to individuals touring alone.

Several companies now offer smart lockboxes with onetime codes to let buyers access the home through their smartphones. Minimal furniture can be left for staging, but nothing small enough to be stolen easily.

Sellers who are allowing individual buyers into the home while they’re still living there should make sure to vet those buyers carefully weed out the neighbors who might just be snooping around. For open houses, masks, sanitizer, shoe coverings and wipes should be made available at the front door.

Sellers should also be very careful not to overprice their homes. There may be little to choose from on the market right now, but with the economy in free-fall, bidding wars are few and far between.

“Buyers are not desperate, so the pricing strategy still must be sound,” said Rice.

Home prices have not started to fall yet, not nationally, anyway, but the big gains going into this year are gone. Buyers today are more likely to jump at a bargain than they are to pay a premium.

Diana Olick

Real estate is still a popular investment pick. Here’s what you need to know about buying in a downturn

The coronavirus pandemic has made us all a lot more familiar with our homes. But it has also thrown up a great number of questions over the future of the property market.

While global markets were thrown into turmoil in the early days of the outbreak, the property market, broadly speaking, has remained resilient. As of April, the median U.S. house price rose 8% year on year to hit $280,600.

That’s good news for investors. Real estate continues to rank as the top investment pick for the majority of Americans (35%), ahead of stocks and bonds (21%), savings accounts (17%) and gold (16%).

But the coronavirus has shuttered construction sites across the globe, adding to existing supply shortages. And with many industries and individuals now facing uncertain futures, the phrase “safe as houses” has been shaken.  

CNBC Make It spoke to the experts to find out just what might lie ahead for the future of real estate.

Buying a home

Buying a home is often seen as one of the most important and prudent financial investments you can make.

During times of economic distress, that conventional wisdom can be thrown into question. The 2008 global financial crisis, which originated in the property market, was a major knock on confidence. However, financial experts broadly agreed that this downturn will not hurt housing in the same way.

“In most historic recessions, the property market has either remained largely resilient or was only impacted across certain real estate sectors,” noted Dhruv Arora, CEO of digital wealth manager Syfe.

Notwithstanding the short-term difficulties of conducting in-person viewings, that means that now remains a reasonable time to think about buying a home once cities and states reopen.

With interest rates slashed in a bid to stimulate global economies, the cost of borrowing has become cheaper, which could make mortgages more affordable for those with adequate finances. The same goes for refinancing a current home.

Trent Wilshire, economist at Australian property site Domain, said that could encourage more people to get back out into the market. It is already starting to happen in Australia, where lockdown measures are easing, he noted.

“Transactions will start rising again in coming weeks but are still likely to be sluggish compared to late 2019/early 2020,” he said. “We’re already seeing a pick-up in recent weeks, with new ‘for sale’ listings rising the past few weeks and rising enquiries on Domain from potential buyers.”

That said, the nature of the coronavirus pandemic remains uncertain, and it’s important to look into the specifics of the local and national market of the city in which you’re looking to buy.

Buy-to-let real estate

A buy-to-let property can offer a great source of passive income, via rental payments, and capital growth, through price appreciation. It can also offer an alternative route onto the property ladder for first-time buyers who are unable to buy in their preferred area.

Those fundamental attributes remain true in the current climate. Indeed, the economic slump has likely exacerbated existing trends, which have priced many young people out of buying and inflated the renters’ market.

The best investment opportunities will be in those places where the labor market is the least damaged.

That offers opportunities for those in a position to invest. However, with the global economy on the rocks, so too is the renters’ market. Prospective landlords should be cautious that some tenants may struggle to make their payments.

“It’s all going to be about location. The best investment opportunities will be in those places where the labor market is the least damaged,” said David Lebovitz, global market strategist at JPMorgan Asset Management.

As with residential homes, buy-to-let properties suffer the same logistical hurdles right now in terms of conducting viewings and processing sales.

Commercial real estate

Commercial real estate, which encompasses the hard-hit hotel and retail sectors, potentially poses the biggest risk for investors.

So far this year, the commercial real estate market has fallen almost 28%, with hotels & resorts and retail spaces down 48% and 40%, respectively.

Syfe’s Arora said the drop-off will take some time to correct. That recovery is likely to be “gradual” — or U-shaped rather than V-shaped — as economies embark on phased reopenings, he said.

However, where there are downsides there are also opportunities, Arora noted.

“As always there will be investors who look at the long-term potential of these real estate sectors,” he said.

Sectors with “strong fundamentals,” such as industrial, residential and specialized real estate, show particular signs of resilience, said Arora. Meanwhile China — initially at the forefront of the outbreak and now leading the charge on economic reopening — offers cues as to which sectors thrived under the pandemic, chiefly health care and logistics.

“We still see value in direct real estate as a source of income, and more broadly, as a portfolio diversifier,” added Lebovitz, highlighting direct purchases and real estate investment trusts (REITs) as some of the best options.

“We believe it is about combining REITs and direct real estate, particularly given that REITs provide greater exposure to more forward-looking sectors,” he said.

Building the foundations

Before embarking on any financial investment, real estate or otherwise, it’s important to get the foundations right.

Typically, financial advisers recommend setting aside roughly three months’ salary in cash to tide you over in case of an emergency. In the current economic environment, six months’ worth might be a safer bet, however, according to personal finance expert Ramit Sethi.

“An emergency fund is money saved for any unexpected expenses. It gives you the piece of mind knowing you have a hedge against the worst financial disasters,” he writes in his blog “I will teach you to be rich.”

Additionally, it’s important to set aside extra funds to cover the legal and transactional costs associated with buying a property.

Karen Gilchrist

Struggling to pay your mortgage? Here’s how to get help

KEY POINTS
  • Under the CARES Act, homeowners experiencing financial hardship due to Covid-19 can be granted forbearance on a federally backed mortgage loan.
  • The program allows borrowers to delay their monthly payments for a year. Those payments are then tacked on to the end of the loan or paid back over time in a mortgage modification.
  • About 4 million homeowners have already taken advantage of the government’s mortgage forbearance program.

Loan debt relief

While borrowers can delay their payments for up to a year, the initial period is 90 days. If you want an extension, you must contact your loan servicer to reapply. Dodging further mortgage payments will result in consequences.

Wait times with servicers were long at the start but are now down to just over 5 minutes on the phone, according to the latest survey from the Mortgage Bankers Association. Some servicers even have put the entire application process online.

Coronavirus vs. subprime mortgage crisis

The alacrity with which the entire mortgage industry had to adopt these programs was prodigious. To put it in perspective, as a result of the subprime mortgage crisis —  a nationwide financial crisis that occurred between 2007 and 2010, that contributed to the Great Recession — 8.6 million borrowers received a mortgage modification, either through government programs or private lenders. During that same period, 8.9 million homes went into foreclosure, as many of those modifications failed. The coronavirus crisis is now only in its third month in the U.S.

Still, most do not expect the same tragic outcome for homeowners and home values. The housing market was far stronger coming into this crisis, with high demand, extraordinarily low supply and strict mortgage underwriting.

“This time around we had a lot of refinancing happening in the two years leading up to this, so a large number of customers still have disposable cash, and I think that’s helping us a little bit,” said Sanjiv Das, CEO of Caliber Home Loans and former CEO of Citibank Mortgage during the subprime crisis. “However, if unemployment gets as deep as some are predicting, if it gets to the mid-teens, it could be far deeper than the subprime crisis.”

By contrast, during subprime, the housing market was overbuilt and driven by speculative investors who were pumping up prices using risky mortgage products that no longer exist.

“Following 2008, we witnessed severe house price declines, negative equity and a flood of defaults. House price declines were accompanied by a swift runup in job losses and unemployment. As a result, borrowers were not only unable to make payments in a timely manner but also unable to exit existing mortgages by selling their home,” wrote Laurie Goodman, vice president of housing finance at Urban Institute in a recent blog.

Drawing criticism over leniency

Although the program was implemented to offer relief, it has been drawing some criticism because borrowers are not required to submit documentation to prove economic hardship. They simply have to tell their mortgage servicers, those who collect their monthly payments, that they have been hurt financially by Covid-19 and need help.

“The administration made a huge mistake bringing moral hazard in, and thrust extraordinary risk into the private sector that could collapse the mortgage market,” said David Stevens, former FHA commissioner and former CEO of the Mortgage Bankers Association.

But others disagree, claiming borrowers needed swift action without the burden of a likely lengthy documentation process.

“I do not believe it is a moral hazard,” said Jay Bray, CEO of Mr. Cooper, one of the nation’s largest nonbank servicers, which already has approximately 200,000 of its loans in forbearance. “It’s not a payment forgiveness plan.”

More from Invest in You:
Here’s what you need to know about rent relief during the pandemic
This simple financial plan makes it easier to get through tough times
Here’s what to do when you are out of work and the bills are piling up

Home equity is now at a record high. Buyer demand plummeted at the start of the economic shutdown but is slowly beginning to climb back up. The number of forbearance requests, however, is still climbing, and some already are approaching the end of their 90-day term.

If you need help beyond the forbearance expiration …

While it is very easy for borrowers to get into the government mortgage forbearance program, the end game is not as simple. There are several options, depending on a borrower’s financial ability.

Loan servicers are required to reach out to borrowers 30 days prior to the plan’s expiration date. At that time, borrowers have three options: Make all the missed payments in one lump sum, add the forbearance amount as additional payments or a lump sum at the end of the mortgage, or ask the loan servicer about setting up a repayment plan and spreading out the payments. The size of the monthly payment will be based on affordability, and documentation will need to be submitted.

There are also several options for mortgage modifications. These can include extending the life of the loan and/or lowering the interest rate. Some of these modifications will require the borrower to submit documentation of income loss. If anyone did actually lie when requesting forbearance, this could be considered financial fraud.

For most borrowers, the forbearance programs will not hurt their credit score, as the CARES Act states that servicers cannot report this action to credit bureaus. If the loans end up in modifications, however, there can be a credit hit, and borrowers may be unable to secure a new loan on another property or a refinance for up to a year after the date of the modification.

As job losses continue to rise and the economy opens in fits and starts, it is still very unclear what the inevitable damage will be to the overall housing market and to individual homeowners. Some are predicting home values to drop by up to 4% this year, with a recovery beginning toward the end of next year. As with everything else in this pandemic, however, so much is still so unknown.

Diana Olick

Weekly mortgage applications show real recovery in homebuying, as interest rates set another record low

KEY POINTS
  • The average contract interest rate for 30-year fixed-rate mortgages decreased to a record 3.40% from 3.43%.
  • Mortgage applications to purchase a home rose for the third straight week, up 7% compared with a week earlier.
  • Refinance applications decreased 2% for the week but were 210% higher than a year ago, when rates were over a full percentage point higher.

Homebuyers appear to be heading slowly back into the market, as the coronavirus-stricken economy begins to reopen.

Total mortgage application volume rose 0.1% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. The gain was driven entirely by buyers.

Mortgage applications to purchase a home rose for the third straight week, up 7% from a week earlier. Purchase volume was still 19% lower annually, but that annual loss is shrinking by the week. Just three weeks ago, purchase volume was down 35% annually. Demand last week was led by strong growth in Arizona, Texas and California.

Buyers are responding to incredibly low interest rates as well as to new technology and processes that allow them to house-hunt from afar. Agents are offering virtual showings or live tours over apps like Facetime or Zoom. For empty homes, they’re also allowing do-it-yourself tours, using high-tech lock-boxes that buyers can access from their smartphones.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 fell to 3.40% from 3.43%. The new rate is a record low for the weekly survey, which began in 1990. Points decreased to 0.30 from 0.34, including the origination fee, for loans with a 20% down payment.

Lower rates are not boosting refinance volume. Those applications decreased 2% for the week but were 210% higher than one year ago, when rates were over a full percentage point higher.

“Despite lower rates, refinance applications dropped, as many lenders are offering higher rates for refinances than for purchase loans, and others are suspending the availability of cash-out refinance loans because of their inability to sell them to Fannie Mae and Freddie Mac,” said Mike Fratantoni, MBA’s senior vice president and chief economist.

The refinance share of mortgage activity decreased to 70% of total applications from 71.6 % the previous week.

Diana Olick

Fannie and Freddie will now buy loans in mortgage bailout program, in a bid to loosen lending

GP: Freddie Mac Headquarters As Fannie, Freddie Allowed To Boost Capital Buffers By Billions - 106480402

The Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, announced that the two mortgage giants will now buy home loans that go into the government’s forbearance program just after they close.

Fannie and Freddie had not been doing that, and as a result, lending had tightened up dramatically.

“We are focused on keeping the mortgage market working for current and future homeowners during these challenging times,” FHFA Director Mark Calabria said in a release. “Purchases of these previously ineligible loans will help provide liquidity to mortgage markets and allow originators to keep lending.”

Mortgage lenders, both bank and non-bank, sell most of their loans to either Fannie Mae or Freddie Mac, known as government-sponsored enterprises, or GSEs. Or, if they are backed by the FHA, they are sold to Ginnie Mae. It can take a few weeks after a loan closes for it to be sold. When the government’s mortgage bailout started just over a month ago, some loans that had just closed, but were not purchased yet, went into forbearance.

The forbearance program allows borrowers with economic hardship due to Covid-19 to delay monthly payments for up to a year. Those payments must be made at a later date. The CARES Act, which was signed into law late last month, does not require that borrowers provide any documentation or proof of hardship.

More than 3 million loans are already in the forbearance program. Because Fannie and Freddie wouldn’t buy the loans that had just closed, credit tightened up dramatically, making it harder to get a new loan for all borrowers. Lenders were afraid any loans they made might go into forbearance before they were sold, leaving them on the hook, unable to sell them.

This announcement should loosen the market somewhat, although there are certain eligibility criteria and limits, according to FHFA:

  • The mortgage loan must have closed on or after Feb. 1, 2020, and on or before May 31, 2020.
  • The loan must be a mortgage purchase transaction or a no-cash-out refinance.
  • The loan cannot be more than 30 days delinquent.

In addition, eligible loans will be assessed an additional loan-level price adjustment — 5% for first-time homebuyers and 7% for non-first-time buyers.

There is disagreement, however, on what these higher costs could do to mortgage rates. Some say they could cause mortgage rates to fall slightly, as the credit box opens up more. Others say some lenders will pass those costs on to borrowers in the form of higher rates.

“We welcome the change in policy that directs the GSEs to purchase most loans in forbearance,” said Bob Broeksmit, CEO of the Mortgage Bankers Association. “We [are] looking forward to working with FHFA and the GSEs to arrive at more appropriate pricing and broad coverage for all transaction types.”

Diana Olick

CEO of mortgage giant Quicken Loans explains how struggling homeowners can ‘skip the payment’

One of the biggest questions for homeowners facing a coronavirus-related financial hardship is whether to try to pause their mortgage payments.

Quicken Loans CEO Jay Farner told CNBC on Wednesday the company wants to educate people that if they “skip the payment,” they’ll still have to pay it eventually.

“Our tool right now is something called ‘forbearance,’” Farner said on “Squawk Box.” “It gives you the opportunity to pause on making your mortgage payments [with] no impact on your credit. But at some time in the future, you have to catch those back up.”

Many of the nation’s top mortgage issuers, of which Quicken Loans is the largest, are working with clients to help them get through the coronavirus-driven economic halt.

Requests to delay mortgage payments grew by 1,270% between the week of March 2 and the week of March 16, and another 1,896% between the week of March 16 and the week of March 30, according to numbers released Tuesday by the Mortgage Bankers Association.

“We’ve grown our servicing call centers by hundreds and hundreds of people all working from their homes, to take the phone calls, answer the questions,” Farner said. “Our technology team stood up a website that allows folks to get those answers as well.”

Farner advises homeowners to “take a deep breath and do the research.” He added, “If forbearance is the right thing, and taking a pause in the mortgage payments without affecting your credit makes sense, then that’s what we’ll do.”

Another phenomenon created by the economic fallout from the outbreak is that interest rates and, in turn, mortgage rates are plunging to historic lows. That’s leading many homeowners to refinance their loans to lower their monthly payments.

The Mortgage Bankers Association said Wednesday, “The 30-year fixed mortgage rate decreased last week to the lowest level in MBA’s survey at 3.45%.” The group has been tracking weekly mortgage applications since 1990.

Those rock-bottom rates fueled a 10% weekly surge in applications to refinance a home loan. Refi volume was 192% higher than a year ago.

“From a refinance perspective, applications have been the strongest we’ve ever seen,” Farner said. “In fact, March was the biggest closing month in our company’s history — nearly $21 billion in mortgages closed.”

“April will be bigger. We did close to $53 billion in the first quarter, and we’re estimating near $75 billion in mortgage applications in the second quarter,” he added.

 

Matthew J. Belvedere