The New Abnormal
We've just turned the corner from March to April, but here in the San Francisco Bay Area, we are still sheltered in place (SIP). Everybody in our home is making adjustments to our new abnormal and it's a good lesson for today's homeowner too. We may not be able to move around or go out, but can we hunker down and tweak our financial situation so that it better positions us to weather the next few months?
First, a little perspective. Even if the health implications of the pandemic miraculously prove to be short-lived, my sense is that the economic ripples will reverberate well beyond that timeline. Why? Because in finance we tend to see credit capacity build slowly and steadily, but evaporate suddenly and even violently. Even though we are in the early innings of dealing with COVID-19, much of the mortgage industry has seen significant pullback in loan options for the consumer. Among them:
- The all-but-complete disappearance of non-QM loan product (bank statement programs, asset-depletion mortgages).
- The tightening of guidelines on jumbo and portfolio loans (lower loan-to-values, restrictions to cash out).
- Higher rates on riskier loan options.
This is the underlying market's way of saying that it feels it's time to be more conservative, trim expenses and reduce risk exposure. As consumers, it might be beneficial to follow that lead.
So how do we accomplish our own rebalancing of risk and expense when we're homeowners? The primary way we'll see our clients do this is through a refinance. Of course, if you already have a low, fixed-rate loan, you may be set. But some of our clients who may have previously not been excited by saving $150, $250 or even $350 per month are now suddenly looking at the prospect of reduced work hours or possibly unemployment of one of the working spouses. Viewed in this light, any savings can take on new urgency. And of course, I am never one to advocate for refinancing a loan for short-term benefit while not considering the long-term implications, but current circumstances do, we must admit, change this paradigm. Everybody must first navigate the present's choppy waters in order to sail into the safe harbor of a better future.
Home equity lines of credit (HELOCs) are another strategy the savvy will use. Remember, a HELOC has no payment if you don't draw against it. Some homeowners keep a home equity loan as a safety net. Some take a new line so they have a source of capital during a downturn and a way to make an investment that other, cash-strapped buyers cannot. Sure, there is risk, but how many people do you know who say they wished they had bought at the bottom of the last crash? Let me let you in on a secret. There are two reasons they didn't; first, they didn't have the resources to do it. Second, they were scared, like everybody else.
Make no mistake about the COVID-19 pandemic --- this is wildly unfamiliar terrain for everybody. It's also our new, daily existence for some time. We can hope and wish and pray it will blow over soon, and like you, I'm optimistic it will. But in the meanwhile, I am taking financial matters into my own hands and advising my clients to do the same. Some of the old rules don't apply here and even the ones that do must be viewed in the light of our new abnormal.