Financing Real Estate During a Pandemic
July 1, 2020
CEO/Owner, B.E. Lending
For the majority of those obtaining real estate financing during the current COVID-19 pandemic, the result has likely either been quite positive, utterly negative, or both. Regardless, not many can say our new lending environment is status quo any longer. Ever since the pandemic largely began disrupting financial markets in early March 2020, lenders have been trying to navigate unchartered territory. Initially, many conventional lenders, banks, credit unions, and private/hard money lenders tightened their underwriting standards across the board as both the stock market plummeted, and bond buyers pulled back because of illiquidity and lack of confidence in the market. Fear then set in about the short and long-term unknown economic consequences that may ensue as businesses across the nation closed at an unprecedented rate and unemployment reached historic levels not seen in generations. Much is still unknown about the long-term consequences on our society from both the virus and our aggressive response to it.
What is known is that until markets stabilize and unemployment reverses trend, as it appears to have begun in May, lenders will likely be underwriting loans quite conservatively, particularly for non-owner-occupied investment properties or commercial real estate. Many private lenders had stopped lending entirely and are only now starting to enter back into the short-term investment lending space. Investment loans for both commercial and non- owner-occupied residential properties will likely see escalated rates and reduced leverage until the markets stabilize. Currently, most lenders are looking for risk adverse lending opportunities and are less willing to venture into speculative investments including fix-n-flip, new construction, land development, hospitality, and commercial retail. These loans will be much harder to attract both conventional lenders and private money lenders until the current crises is averted, resulting in higher risk premiums perhaps to both the lender and investor.
The lending outlook for the coming months will significantly favor those who have retained stable employment, good credit and have available liquidity. Interest rates will likely remain low for the foreseeable future for conventional loan products. Owner-occupied interest rates have dropped to the lowest level in history since Freddie Mac began tracking interest rates in 1971 producing a genuinely great opportunity to refinance, if you can qualify. According to www.Macrotrends.net (see chart), in May 2020 the average 30-year fixed-rate hit its lowest average rate ever recorded at 3.15%, and may be trending even lower. Excellent credit scores, stable income, low debt (especially credit card debt) and established job history are still paramount to qualify for the most attractive loans. Many portfolio lenders that had begun lending over the last few years to Alt DOC borrowers, albeit at higher interest rates, have since paused many of their new originations. Most lenders are focusing their origination efforts toward lower leverage asset based debt, or sticking with conventional and FHA loans that can quickly be sold on the secondary market to the government-sponsored entities (GSE) Fannie Mae and Freddie Mac. Lenders are mitigating their risk more quickly in response to economic trouble this cycle because they do not want to hold potentially toxic loans on their balance sheets long-term again.
That said, with supply still squeezed and demand holding steady, we may likely continue to see price appreciation through the 2nd and 3rd quarters and beyond in Arizona, which will inevitably soften lending criteria again. Absent a major resurgence of the virus in the fall, and assuming employers recover enough over the coming months to re-hire their workforces, we may even see loan underwriting criteria return to pre-Covid-19 levels by late 2020. We also have not seen a surge of foreclosures locally or nationally because of the unprecedented response from the GSEs which own more than half of all outstanding residential debt. All borrowers with a loan owned by a GSE that have been impacted by Covid-19 (virtually everyone) are allowed to request an initial 6-month forbearance on their mortgage payments, then another 6-months if still impacted. It’s presumed that most of the borrowers will repay the missed payments upon refinance or payoff, but with a forbearance agreement in place there is virtually no immediate consequence for missing a GSE loan payment right now, and many other large institutional creditors have followed suit without even requiring a negative report to the credit bureaus. Combine that with the fact that federal servicing guidelines for larger loan servicers generally cannot even commence a trustee sale on a delinquent loan until the loan is effectively 4 months delinquent. From there, it’s another 3 months minimum for the trustee sale date to be scheduled, meaning the earliest wave of GSE related foreclosures for new delinquencies as a result of the pandemic realistically won’t start hitting the distressed market until late 2021 or 2022, if at all, during this real estate cycle.