Lenders in uncertain territory, but hopeful

As a result of home sales volume dropping by 30% in Quarter 2 of 2020 from 2019, loan origination has also dropped considerably. The effect was somewhat lessened by low interest rates, which resulted in more refinances. The commercial sector, however, didn’t have that luxury. The Mortgage Bankers Association (MBA) forecasts a 59% decrease from 2019 in total commercial loan amount, from $601 billion to $248 billion. The majority of this will be from the multi-family sector, which was at a record high of $364 billion in 2019 but is only expected to reach $213 billion this year.

Lenders are optimistic, though, as long as governments can continue to keep people housed. Vacancies aren’t great for lenders, as they reduce the prospects of landlords, and recently evicted people certainly won’t be looking to originate new home loans any time soon. The MBA expects 2021 to bring the number up to $390 billion for commercial loans. The catch is that commercial landlords aren’t protected by the recently extended foreclosure moratorium. If multi-family homeowners are hit with a foreclosure, all their tenants will be affected as well. Commercial property owners as well as lenders are looking for new methods of loan accommodations.

Photo by Morning Brew on Unsplash

More: https://journal.firsttuesday.us/commercial-lending-plummets-in-2020/72811/

Mortgage Quick Facts – 1

Did you ever wonder where the money comes from to make mortgage loans? Or, how the interest rates are determined? As complex as lending can become, most of the time it’s pretty straight-forward. When the systems are operating as designed, it works as follows.

And the money goes round & round

The Federal National Mortgage Association (Fannie Mae) and theFederal Home Loan Mortgage Corporation (Freddie Mac) are semi-privatized financial institutions that buy mortgages and bundle them into financial securities and treat them like bonds. Then they sell the mortgage-backed securities to investors.

It’s those investor funds which keep money flowing to the mortgage finance system. After you get a mortgage, the lender sells the loan on the secondary market, probably to Fannie or Freddie. By selling the mortgage, the lender gets its money back quickly so it can lend the money again, to another mortgage borrower.

The secondary market and you

The secondary market encourages mortgage lenders to lend more funds to more buyers, because the lender’s money is returned quickly, rather than being tied up as you gradually repay it over the years. When the lender sells your mortgage, the lender gets the full amount of the loan back immediately, with a profit, which can then be reinvested.

Meanwhile, investors, predominantly “institutional investors,” such as employee retirement funds, buy these securities because they offer stable payments for the members of their institution.

It’s these investors in the secondary market who collectively determine the interest rate of your mortgage loan. Your lender offers you an interest rate that investors on the secondary market are willing to buy.

Ups and downs of bonds

As with stock and bond markets, prices and yields on the secondary market move up and down. When the economy is on an upswing, investors demand higher yields on mortgage bonds, trying to keep pace with the stock market. In turn, this forces lenders to raise mortgage rates. In a market downturn, the paucity of investment opportunities means investors will accept lower interest rates which then tend to drop for home buyers.

Next Issue: How does the Federal Reserve Bank impact interest rates?