Mortgage Refinancing in a Covidious Time

A brief note on mortgages in a covidious time...

Back in June 2020, we refinanced our mortgage to take advantage of lower interest rates - never let a crisis go to waste and all that. For what it's worth, we went from a 4.5% 30 year mortgage to a 2.5% 15 year loan, saving something like $200,000 in interest payments.

This being America, perhaps with the savings we've made, one of our children will be able to afford a year of university when the time comes - or hopefully a semester, one can always dream (stay on topic, man, tackle spiraling higher education costs another time).

This was at the height of the pandemic and although lockdowns were lifting, vaccines were not in sight, the whole world was in upheaval. Luckily, The Wife and I still had jobs and were working from home - albeit I had taken a 20 percent salary deferral as The Company sought to preserve cash and cancelled all chip orders and such, snarling up the supply chain in the process (but I digress yet again - car company executives are not often lionized for their financial savvy, call it herd mentality in a time when we were all seeking herd immunity).

Anyway... we saw interest rates at historic lows and tried to act.

Sidenote: I had never seen a faster reaction than that of my previous mortgage broker at my "Looking to refinance" email. Left to him, we'd have sealed the deal that very day. He was hungry for my business; the global pause had brought about a great financial shock, it really seemed to be a buyer's market.

There were a few glitches, however, and where there are glitches, there is toli...

A Live Human

The first issue we encounted was when the mortgage company wanted to verify employment.

I asked my manager and he pointed me to GM's official process for employment and wage verification. As a large company, it employed a vendor to automate this process. I went along and set things up at the vendor, The Work Number, and provided it to the mortgage company.

I got the following response from the broker. Apparently, enough of the 40+ million newly-unemployed Americans had applied for mortgages just after being laid off, that all mortgage underwriting companies were tightening requirements. They were now requiring to speak to a live human to verify things.

"Unfortunately, we can't use automated verifications. The system is not current... meaning up to day to day. So the HR person will just need to verify that you are an active employee 2 days before closing. Again, it's a Covid guideline so we have to make sure you haven't been laid off."

In other words, mortgage fraud was rampant. Mortgage servicers weren't trusting any of the automated systems that were in place. A live human was needed for verification.

This was also one of my first encounter with that felicitous phrase, covid guideline. A phrase that quickly become a catch-all and authoritative, even when said guideline was sometimes questionable. Middle management and frontline staff alike could just allude to a covid guideline and all manner of nuisant rules would manifest themselves.

(Covid Guideline also sounds like the name of an indie band.)

I didn't want to put my supervisor or assigned HR partner on the spot by giving out their contact details to verify employment. That would be wrong and I didn't want to go against The Company's process.

But I was in a bind if all mortgage companies were now wanting to contact a live body in light of the pandemic. I wondered if I should try to find a different mortgage company, if one existed, that would proceed with the automated process. From what I understood however, all other underwriters were in the same boat. I briefly considered feigning cold feet with my broker just to see him sweat a little (so keen was he for my business).

The news reports indicated that this was a widespread issue

WSJ Says Banks Can’t Determine Who Is Credit-Worthy: More COVID-19 Fallout

‘Flying Blind Into a Credit Storm’: Widespread Deferrals Mean Banks Can’t Tell Who’s Creditworthy

Millions of Americans are out of work and behind on their debts. But, in many cases, the missed payments aren’t reflected in their credit scores, nor are they uniformly recorded on borrowers’ credit reports.

The confusion stems from a provision in the government’s coronavirus stimulus package. The law says lenders that allow borrowers to defer their debt payments can’t report these payments as late to credit-reporting companies.

Lenders that are having a tough time spotting risky loan applicants are approving fewer borrowers for credit cards, auto loans and other consumer debt. They are also hunting for new data sets that could indicate who is in financial trouble and how much they need to set aside to cover soured loans. The Federal Reserve last week said the biggest U.S. banks could be saddled with as much as $700 billion in loan losses in a prolonged downturn.

“Without accurate information, their only option is to pull back on credit,” said Michael Abbott, head of banking for North America at consulting firm Accenture PLC. “Banks don’t know who is going to pay and who isn’t. It’s like flying blind into a credit storm.”

Banks started tightening their underwriting standards in March, when the first wave of coronavirus layoffs began.

A year later in 2021, this low trust environment still persisted

Lenders are calling employers to confirm that the homebuyer will have permission to work remotely when the pandemic ends. Rates are lower for loans on primary residences, and the lender also wants to make sure the borrower actually plans to work after getting the loan.

Luckily for me, after some back and forth between the broker and my employer's human resource department, things worked themselves out. I was able to be verified. Our HR department found itself staffing up virtual call centers to do the work that they had previously paid good money for an automated solution from an external vendor. Live humans were indeed needed.

Attestation

Our closing ceremony was quite eventful as I've previously recounted. Interestingly, a curious document manifested itself during that process - a "Covid-19 attestation" that the notary insisted that we sign. The financial situation of millions was in upheaval; the breakdown in trust across society was complete, and mortgage companies sought to protect themselves by adding whatever they could to the closing process even if of dubious legal standing.

I affirmed that the income documentation (my last paystubs) I had provided was unaffected by "the COVID-19 resulting economic impact, and I am not aware of any future changes in my employment status and/or income that will affect my ability to repay my loan".

As I signed, I questioned how the mortgage company ever hoped to enforce that attestation and what value it would have if indeed my income did change dramatically. Perhaps someone can enlighten me. What actual use is that Covid-19 attestation in legal terms? Force majeure is what it is, attestation notwithstanding.

From what I understood, the majority of fraud in the US during the covid years concerned repayment of covid relief PPP loans. I was a little surprised that even garden variety real estate mortgages were similarly precarious.

I believe things are stabilized four years on, and that there has been a return to the normalcy. The credit environment and the mechanics of the mortgage process have adjusted. Higher interest rates will cool excess exuberance, I suppose. Colleagues that refinanced last year inform me that our company's automated employment verification solution was accepted. The Covid-19 attestation endures however...


...

The New Process

Speak to a live human
And sign the attestation
So go the covid guidelines

Attestation, a playlist

A soundtrack for this note (spotify version)

• Attestation by Manifest
• Human by Human League
• Truth and honesty by Mica Paris
• Trust and Believe by Keyshia Cole
• Human nature by Michael Jackson
• Attestation by Peter Martin
• Verified by Your Favorite Martian
• Attestation by Quartier Danger
• Glitches by Amel Larrieux and The Roots

...

(I'm revisiting some of the notes I jotted down in the first years of this ongoing pandemic, do let me know if you find them useful)

This note is part of a series: In a covidious time.

File under: fraud, process, mortgage, housing, risk, finance, crime, USA, culture, observation, perception, bureaucracy, trust, economics, automation, law, covidious, toli

Writing log: June 21, 2020. January 13, 2024

Home Economics

The Wife and I have been thinking of buying a house for the past year and, since spring, have been mostly bemused at the huhudious prices that were being quoted to us (with straight faces, mind you) for mostly depression era houses. Thus we've been getting an education on the hard sell during our few months of attending open houses, and also some lessons in home economics.

The New Mathematics

After last week's action, some new mathematics is in effect. We have the following equation:

Maximum prudent ™ house price = $521,250 = $417,000 (maximum federally-insured mortgage) + 20% downpayment

Note: prudent ™ denotes a conforming loan and home financing deal that wouldn't raise the eyebrows of even the staidest banker.

Note: the days of 20 percent downpayment have been out of fashion for a long time (we live in a subprime era) so we'll relax our stringent banker conservatism and use a 10 percent downpayment as our baseline. This reduces the maximum prudent house price to $463,333.

Note: the conforming loan limit of $417,000 is the maximum federally-insured mortgage above which point we are in the realm of jumbo mortgages which have all of a sudden become quite scarce.

Voodoo Economics

The median price of housing listed in the Bay Area was said to be $785,380 in February 2007 when we started looking in earnest. That was the listing price and not necessarily the sale price but, regardless, that was sticker shock by any definition.

In June 2007, the median housing price paid in the Bay Area was $665,000, a new peak. See also a trend graph of an earlier data set.

The typical monthly mortgage payment in the Bay Area was $3,219. "adjusted for inflation, current payments are 24.0 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle." Jumbo mortgages "represented 62 percent of the purchase loans" made in the area.

Jumbo Jitters

Putting these things together, it is clear that something does not compute. The force of gravity will make itself felt and the $200,000 gap - the fat on which the housing sector in the Bay Area has been feasting on for the past 15 years - will of necessity be closed. The only questions are how much the gap will narrow and how long it will take.

The typical price of the only reasonable houses we have seen during our search was $750,000 (The Wife has called much of the rogues gallery that were shown to us "illegal dwellings"). We thought we'd seen an overheated market in Boston but the Bay Area has redefined our perceptions on that front. A software engineer and history professor ought to be able to afford a starter house.

The hard sell and the real estate shell game was in earnest and it was as if the whole town was in on the con. The pinnacle was the university housing officer who advised her academic client that we could easily afford a $700-800,000 mortgage - if you ran the numbers, monthly housing payments (circa $5,000) would far exceed the salaries of most academics which prompted said academic's quip "I'm not going to spend that much on a depression era bungalow" to the surprisingly-shocked agent. I suppose I would have put it as the Emperor has no teeth.

Even if we could afford such imprudent things we'd rather spend our money traveling to more congenial settings, we are modern travelers and exiled souls after all. The funny thing is that if you spend enough time talking about housing in the Bay Area, you could almost convince yourself that everything was normal. Nobody blinked in conversation; the stratospheric prices were just the way things were — indeed it was so surreal and you could very easily allow yourself to be bamboozled — there was a week where we almost succumbed. Almost...

There's lots of moral hazard in the mounting chorus to bail out the fiscal wizards. Many are lobbying for the limits on Fannie Mae and the like to be lifted or for interest rates to be cut. Sidenote: the language of financial panics is always interesting: credit crunch, mortgage meltdowns, debacles etc. Fed chairman Ben Bernanke has been known for his "cautious experiments" in the past and will surely come up with some kind of intervention. When well-heeled bankers start invoking the spectre of millions out on the street you can almost hear the subliminal "think about the children" message. John Kenneth Galbraith is sorely missed.

In any case, we continue to search for a home... For the first time last week, we saw advertised a condo in a nice neighbourhood that was priced under the new mathematics at $469,000 - some sellers obviously need to cash out quickly (similar houses were priced at $650,000 just a few months ago). Hopefully we'll start seeing more of these things and it might even become a buyer's market. I won't hold my breath however; there's a surplus of unreality in the Bay Area.

In closing I'll note that Ikea was packed last weekend — everybody is doing home improvement, it seems. I don't think much of it was about putting a shine on show houses that you needed to flip ("one last try"), rather I suspect that it was belt-tightening at work, and making do with what you have. Time will tell and we'll be waiting this one out in our rented nest.

A Subprime Playlist

Some music for those inclined to home economics...

• Dionne Warwick - A House Is Not A Home
  Dionne really came into her own when she sang the Burt Baccarach songbook. It was a sublime case of pathos, operatic pop as it were featuring Baccarach's lyricism distilled in that delicate voice. All her later monetary triumphs stemmed from the magic of those wonderful interpretations.
• Kool Moe Dee - They Want Money
  I was going to pick Money Jungle by Duke Ellington, Charlie Mingus and Max Roach for this playlist - the song (and album) is suitably jarring and tense, but I thought that Kool Moe Dee would be more appropriate. The title of the album is a key indicator: Knowledge is King. Laymen are always the last to get bailouts hence education is key to prepare for the periodic shocks of the grifter impulse. They Want Money is the soundtrack for Jim Cramer's crew, its blaring horns an ode to Alan Greenspan's politically expedient teaser rates, its rapid-fire lyrics are dedicated, with respect, to all those who have been selling a bill of irresponsible goods in the housing market.
• Simply Red - Money's Too Tight To Mention
  Social commentary of hard times and explicit lyrical harkening to Reaganomics. Mick Hucknell saw the darker side of trickle down economics and told it like it was. There are of course thousands of "no money" blues but when rendered in this pop vein, never have they been so upbeat or danceable. Perhaps one should also mention here Money to Burn by Wrinkars Experience in the reggae vein and round things off with the Wu-Tang Clan's C.R.E.A.M. ("Cash rules everything around me, cream get the money, dollar, dollar bill y'all")
• Luther Vandross - A House Is Not A Home
  I really need to do an appreciation piece on Luther who, like Aretha, had the uncanny ability to make any song his own. Simply put, his version is the definitive version - it's not even close. Soul music with all the accoutrements, lush and emotional.

A house is not a home, how true.

File under: economics, housing, mortgage, Bay Area, California, Berkeley, observation, home, money, finance, bubble, debt, subprime, shell game, USA, toli