Are layoffs and the faltering housing market signs of tapping into equity now? – Orange County Registry

Layoffs, a slowing housing market and a likely recession are the talk of the town. If you’re a homeowner worried about losing income in the coming year, then is it time to take equity out of your home – now?

The last housing bust and the subsequent mortgage crisis that led to the Great Recession were caused by substandard mortgage underwriting. In the past, if you could fog a mirror, you could often buy a house, down payment or no down payment.

Today we are in the early stages of a very different kind of bust. Strict underwriting and lots of risk-taking (big deposits) have been the norm for the last 10 years. Just about everyone is home equity rich.

High inflation and an impending avalanche of job losses will put pressure on the cash reserves of many homeowners who may soon be looking for home installments. Can you say: equity rich, financially distressed? For this column, ERFD is our new acronym. Remember it.

Forget for a minute that mortgage defaults (at least one payment past due) are at 3.45%, the lowest since the Mortgage Bankers Association began tracking them in 1979. This is rear-view mirror stuff if you’re listening to mortgage insiders.

“The delinquency rate is likely to rise from its record low in the coming quarters (in part) due to expected increases in unemployment,” said Marina Walsh, vice president of industry research at MBA.

The US Bureau of Labor Statistics reported Thursday that inflation has risen 0.4% since September and 7.7% year-on-year. Freddie Mac’s average mortgage rates rose to 7.08%, just since April 2002, the second time we’ve seen rates above 7% since April 2002. Grocery, gas, credit card interest, and utilities rise, rise, and disappear.

The Bureau of Labor tells us that the national unemployment rate is 3.7%. A year from now it will be more than 6% according to my crystal ball.

Accounting for up to 18% of US gross domestic product, real estate and related industries are the number one canary in the coal-mining economy. Canary number two is Big Tech. Think Meta, Twitter and Microsoft.

Business has all but come to a standstill for mortgage lenders. And yes, it’s a lot worse than the collapse in mortgage volume I remember from the Great Recession. I laid off two-thirds of my employees this year. Many mortgage professionals and many real estate agents are scrambling to cut spending and find ways to tap into their home equity.

Let’s do some sort of financial check to see if you’re close to becoming an ERDF (Equity Rich Financially Distressed) homeowner.

1) Do you worry about losing your job, reducing your hours or expecting a reduced source of income if you are self-employed?

2) Do you have less than six months of household cash reserves? For example, if your monthly home rent, utilities, groceries, medical bills, groceries, and entertainment are $8,000 and you have $40,000 in disposable cash, you are short of $8,000 to cover six months of expenses.

3) Do you have a burn rate? Does that mean that more expenses go out each month than are replenished with income?

4) Do you have at least 25% vulnerable equity? (For example: your home value is $800,000 and the loan balance is $600,000, which means you have 25% vulnerable equity).

5) Are you about to default on an upcoming mortgage payment? According to Mindy Leisure, Advantage Credit’s director of rescoring services, a single 30-day mortgage payment can lower a FICO score by 50 to 150 points and potentially ruin any chance of a new mortgage loan. (Full disclosure: Advantage Credit is my company’s loan provider.)

If you answered yes to three or more of the questions, consider yourself an ERDF.

Policymakers, regulators, mortgage lenders and other industry stakeholders do not want a repeat of the foreclosure fiasco of the Great Recession. They’ve worked hard to set up a number of safety nets, such as nonprofit housing advisory agencies, to temporarily help homeowners with their mortgage struggles.

Everything from partial payments to forbearance and deferred payments and more can be available to keep you in your home.

For example, HUD offers FHA borrowers special forbearance, or SFB, when one or more borrowers have become unemployed and such a loss of income has adversely affected the borrower’s ability to continue making monthly mortgage payments.

Freddie Mac provides a comprehensive list of potential hardships beyond unemployment — such as natural or man-made disasters, serious illness, divorce, or the death of a major borrower.

Do you know what kind of loan you have? Is it conventional, VA or FHA? If you don’t know, contact your mortgage officer to find out what type of mortgage you have and what options are available. For example, ABC Mortgage may service your loan, but Fannie Mae might own the loan.

For Wells Fargo Bank-owned mortgages, options include forbearance, repayment, and loan modification.

“Customers facing (financial) changes should contact us as soon as they have concerns about their monthly payments,” said Tom Goyda, senior vice president. “(You) don’t have to miss a payment to be eligible for assistance.”

My advice? Prop up your budget. Cut costs where you can. If you have other assets like stocks or annuity funds, find out how quickly you can access and liquidate those funds. Consult your tax advisor as the liquidation may give rise to a taxable event. Do you have family or close relatives who can support you financially?

Finally, allow yourself an honest reality check. The lifelines of government and lenders are temporary, not permanent. If you can weather the coming economic storm, good for you. If you are unsure, ask yourself whether it is better to sell and go home with some equity.

Black Knight reported that US mortgage holders lost $1.3 trillion in home equity in the third quarter of 2022. Homes have lost 2.6% in value over the past three months.

I estimate that in a year’s time we will find that houses have lost 10.4% in value.

Freddie Mac evaluates news

The 30-year fixed rate averaged 7.08%, up 13 basis points from last week. The 15-year fixed rate averaged 6.38%, nine basis points higher than last week.

The Mortgage Bankers Association reported a 0.01% drop in mortgage applications from the previous week.

Bottom Line: Assuming a borrower receives the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $2,722 less than this week’s payment of $4,341.

What I see: Locally, well-qualified borrowers can get the following one-point fixed rate mortgages: A 30-year FHA at 5.875%, a 15-year conventional at 6.625%, a 30-year conventional at 6.125%, a 15-year conventional high balances ($647,201 to $970,800), a 15-year high conventional balance at 5.875, a 30-year high conventional balance at 6.375%, and a jumbo 30-year buy, fixed at 6%.

Note: The 30-year FHA-compliant loan is limited to loans of $562,350 in Inland Empire and $647,200 in LA and Orange counties.

Star loan program of the week: A 30-year jumbo purchase mortgage, locked at 6.25% for the first seven years, interest-only with no points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or Are layoffs and the faltering housing market signs of tapping into equity now? – Orange County Registry

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