In my previous article, I emphasized that changes to mortgage guidelines and prudent risk measures would start being implemented by mortgage lenders.
The last point I made touched on secured lines of credit and some measures mortgage companies would likely start implementing to mitigate credit and financial risk. It is very possible, if the economic lockdown continues to degrade the economy, we will see lines of credit arbitrarily closed or in the alternative, available credit limits will be drastically reduced with or without notice to borrowers.
There is very sobering problem with liquidity constraints in the market right now which means there are not many funds circulating, which also means mortgage funds will come at a greater cost to consumers. This is why the interest rates have risen upwards of 70 basis points in the last three weeks despite the retreat by most investors to the bond market (that normally pushes rates down).
Clearly, there is too much risk to investors considering the volatility and skyrocketing unemployment rates which is also why private lenders are not lending nearly as much as they used to or even at all.
Despite the many well-versed economists declaring their predictions and forecasts, the truth of the matter is this is an unprecedented time with no end date determined and not one person has a crystal ball. With each passing business day, there are more lay-offs, more closures of small businesses and much more uncertainty regarding whether unemployment will become permanent or long-lasting even after COVID-19 has been resolved.
While a lender may agree to lend a mortgage at 80 percent of the property's value today, it is essential for them to realize (which they certainly do) that in just two to three weeks from now the same property's value can plummet by ten percent or more. It's not surprising, then, to consider a lender may stop lending at this loan to value and scale back on approved mortgage limit.
Now, regarding lines of credit. Many homeowners have a mortgage product such as a Home Equity Line of Credit registered against their property. I have written about some benefits and disadvantages of home lines before, however, not in this context. I'd like to forewarn borrowers about what we could see happen very soon.
Although having a line of credit with available cash to access in a crisis seems re-assuring, the truth of the matter is any lender can reduce or close this account without any reason or rationale should they decide to. When your mortgage is registered as a collateral mortgage, it is not a conventional mortgage, it is based on a promissory note which allows the lender to have full-reign on the entire credit facility.
This authority allows the lender to exercise all risk mitigation strategies it is entitled to employ, which it will without notice.
Therefore, the question is: if you are someone who has no savings, no cash for a rainy day and are relying on your secured line of credit to get you through a depression (even if temporary), is this a safe position to take?
This is a critical question to ponder and if need be, act on.
Sarah A. Colucci
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci