The Looming Washington State Housing Crisis

Covid 19 doesn’t care if you are a Democrat, Republican, or Independent. It doesn’t care about your ethnicity, whether you’re a man or woman, old or young. It does’t care about you, your family, or your financial wellbeing; it just doesn’t care. It’s here to wreak havoc where ever it can get a foothold and that is why WE have to stick together. We have to take care of each other because together we will beat it, and together we will come out stronger for it!

I don’t believe in crisis politics for the sake of adding to the hysteria surrounding the Covid 19 crisis where so many of our family, friends, and neighbors who are unemployed with no definitive end in sight are hanging on by a thread. I, for one cannot stand by and watch when there is a workable solution to keep families in their homes and apartments. Issues such as these are exactly why I am running for Lieutenant Governor. It’s time to find solutions to Washingtonians most pressing problems and they have to be carefully executed. After all, failure to plan is a plan for failure; as the great Wayne Gretzky said – “You don’t skate to where the puck is, you skate to where the puck is going to be.

In light of the above advice, we already have a history to look back on as recent as the 2008 housing crisis. While you may say this is a different situation and that the bloated, overheated housing market was fueled by greed, and I would be inclined to agree with this, the difference is that greed has been replaced by fear and when you add fear to the fire you’re looking at a possible crash like 2008 on steroids. 

Let’s look at how a mortgage loan works.

Borrower goes to a loan originator for a loan >> When closed it goes to a Servicer >> The Servicer does not “own” the loan but is more of a conduit for “maintaining” the loan >> The borrower sends payment through the Servicer >> Servicer forwards payment to the investor minus taxes, insurance etc. (Hence the term Servicer) >> The loans are sold to an Aggregator or direct to Fannie Mae, Ginne Mae Freddie Mac >> The loan is bundled in to a large group and sent off to an Investment Banker >> Investment Banker converts the loans in to a Mortgage Backed Security which is then sold to the public >> The end product shows up in Mutual Funds and Retirement Accounts.

So, what’s the difference between then and now?

Simply put, 2008 was a situation where the housing and financial crisis was due, in large part, by private lending and lax regulation. The usage of predatory loans in the subprime markets and repackaging of risky loans created a house of cards that took years to dig out from under.

In this situation, the Covid 19 virus is the culprit. it has reached around the globe, into every household, potentially wreaking incredible havoc if we don’t act to head off the coming wave of tanking credit scores due to forbearance. As a nation we went from one of the strongest housing and real-estate markets in 2019, to the tune of 3 trillion dollars, to a full stop in a matter of weeks. Housing construction abruptly stopped causing a backup in the flow of employment, supplies, and real-estate transactions; not to mention what this does to the financial pipeline that keeps this industry moving. 

Where are we?

As of the first quarter of 2020 there is an estimated 5.5 trillion dollars in process of being refinanced in the mortgage system. Jumbo loans are non-existent and in most cases, a minimum credit score of at least 640 is required. Let all of that sink in before we move on; that is a colossal set of circumstance to bring to a screeching halt! But wait, theres more. In order to qualify for a loan, one of the requirements is to provide employment verification. We’re currently looking at a 20 to 30 percent unemployment rate in Washington. This leaves lenders in a incredible hedge loss with no loan servicing income. 

A word about the Forbearance Program.

I am not a financial advisor; your personal situation is for you to decide but it is worth exploring this program and the unintended consequences should it further rock the markets. This program sounds good on the surface but in the financial markets it’s viewed as missed payments. Three missed payments typically means foreclosure begins in or around month four. With each missed loan payment, your credit will take a hit and a vicious cycle may begin. At the end of the three months you must come up with the arrears you owe or face foreclosure.

Jumbo Loans

Some may say, “Muh, Jumbo loan issues don’t effect me.”  Perhaps not immediately however, when valuation is placed on properties through the use of these comps, (or comparisons), that’s when you may take notice. Comps work for the seller and the buyer. If you’re selling, your realtor is most likely basing the asking price from surrounding comps, with the buyer looking at those same comps. Let’s bring it back to Jumbo loans that were procured in a “Hot Market”. If people seeking Jumbo loans can’t receive financing and those looking to sell can’t sell due to funding issues then the downward cycle begins.  Appreciation evaporates as does the equity, causing a ripple effect as the comps trend down through the market ending up at your door step.

Where do we go from here?

The very real domino effect here is a piling on of yet more homelessness on a potentially staggering scale. In my view, we need a mechanism to first, and foremost defend home owners and renters to keep them in their homes. This needs to happen now before we are too far out of alignment with the various revenue streams that are vital to lubricate the system to achieve the maximum results by creating a Home Safe Partnership. Here’s how that would work.

The Plan

Step 1

A series of immediate cash injections to Washington State Housing Finance Commission from the Washington State Tax Surplus to home owners with mortgage payments.

Step 2

A series of cash injections overseen by Washington State Housing Finance Commission flows to Wellspring Family Services. Why Wellspring Family Services? Because they already have a network in place to quickly help with these types of issues and are already established with many employers in Washington State. However, this would be open to anyone needing rent assistance.

How the funds would be distributed

$200 million to offset the forbearance shortfall to mitigate the further downward spiral of home owners. This program would be available to unemployed homeowners and homeowners who may have lost income from an unemployed significant other and would assist as an offset of lost income that would have gone toward the cost of mortgage payments. Proof of unemployment would be required.

$100 million to offset the Second Mortgage market for unemployed homeowners to offset the forbearance shortfall and mitigate the further downward spiral of homeowners. This program would be available to unemployed homeowners and homeowners who may have lost income from an unemployed significant other to assist in offset of lost income that would have gone toward the cost of housing payments. Proof of unemployment would be required.

$50 million to unemployed renters toward past due rent payments to offset the further downward spiral of the renter’s market. This program would be available to unemployed renters  and renters who may have lost income from an unemployed significant other to assist in offset of lost income that would have gone toward cost of housing payments. Proof of unemployment would be required.

The Washington State Housing Finance Commission was chosen because of their extensive experience in assisting homeowners, renters, and builders through their existing network to quickly infuse the allocated funds into the system. This would also be of benefit since the WSHFC is an existing public entity and currently underutilized. Couple this with their relationship with Master Servicer’s and it completes the package.

According to their Mission Statement, “The Washington State Housing Finance Commission is a publicly accountable, self-supporting team, dedicated to increasing housing access and affordability and to expanding the availability of quality community services for the people of Washington.”

Additionally, and here is the important non-partisan approach, the Washington State Housing Finance Commission is overseen by a Commission and an Executive Team. The Commission is appointed by the Governor of the State of Washington.

With the possibility of a second round of Covid 19, (and potentially even a third round), looming in the near future, now is the time to be proactive and put the Home Safe Partnership program in place. Imagine the relief that could come to families knowing they can weather the storm of Covid 19 and not have to worry about losing their homes.

Best Regards,

Bill Penor

Sources:

The Institutional Risk Analyst

MBSHighway.com

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