Coronavirus Updates

The Fed Cut Interest Rates to 0% — What Does This Mean for You?

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development
198 Articles Written
The facade of the Federal Reserve Bank.

To ward off the economic consequences of the coronavirus, the United States government just passed a completely unprecedented $2 trillion stimulus bill. In addition, the Federal Reserve has offered an additional $1 trillion each day of March to keep the repo market functioning. Trump administration economist Larry Kudlow said, as such, the overall stimulus would likely come to $6 trillion—the above mentioned $2 trillion stimulus and $4 trillion in lending from the Federal Reserve to various private banks and institutions.

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Amongst these surreal numbers that are being thrown around, the Federal Reserve also cut its benchmark interest rate to a whopping 0.0 percent. The Fed’s discount rate was also cut to 0.25 percent.

What This Means for Lending

These zero percent rates are not for you, of course. The discount rate is the rate at which banks can borrow directly from the Federal Reserve; the benchmark rate is used as a sort of baseline by institutions throughout the economy. As The Financial Dictionary puts it, the benchmark rate is “…the minimum interest rate investors will demand for investing in a non-Treasury security.” 

One such benchmark is the LIBOR rate. Private banks will often set their interest rates off of this benchmark. For example, the rate might be LIBOR + 2 percent (or something to that effect). So while the Federal Reserve cutting interest rates to zero means that interest rates are extremely low right now, they are most certainly not zero for you and me.

Related: Are Your Tenants Unable to Pay Rent Due to Coronavirus? Here’s What to Do

Even still, the average interest rates being offered by banks on 30-year mortgages were near historic lows earlier this year. Despite the increased economic uncertainty, the Fed slashing its rates should keep mortgage rates low and could drive them lower.

However, even when rates are low, that doesn’t mean that banks will necessarily be lending. Typically, the Federal Reserve dramatically reduces interest rates when the credit market is freezing up. During the 2008 financial crisis, the Federal Reserve also dropped rates to zero and engaged in aggressive quantitative easing—but that didn't stop the recession.

A woman holds a red umbrella on a fishing pier during a storm.

Residential mortgage originations fell by almost 50 percent between 2005 and 2008, and the unemployment rate peaked at 10.2 percent in October 2009. Estimates today are that the unemployment rate could reach between 20 and 30 percent—numbers not seen since the Great Depression.

Even prior to the coronavirus panic, banks had started to tighten lending standards. (Remember, some of us were warning about a likely recession in 2020 last year after the yield curve flipped.)

MarketWatch notes that: "Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses," and, "Loan solicitations by email have dropped for both credit cards and personal loans, according to market-research firm Competiscan."

Banks are also dealing with a large increase in payment deferral requests. Bank of America alone fielded 150,000 such requests this month, and there are worries about the solvency of the mortgage industry long-term if this downturn isn't short-lived.

That being said, the mortgage industry hasn’t ground to a halt.

Related: 10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)

My company just closed a $500,000 loan, and from my discussions with several banks, they are still actively lending.

The loans may be harder to get, but the rates are better than ever. Whereas a year or two ago, we were getting rates in the 5 to 5.75 percent range (for those on the coasts, rates are a bit higher than in the Midwest), right now, they’re ranging from 4.25 to 5 percent.

The long-term economic effects are difficult to predict and depend on a lot of factors. But it would appear that, at least for the immediate future, loans will be harder to get but will also provide better rates than before.

Should You Sell?

This is probably not the best time to be selling properties. I've heard from several real estate agents that there is still a market for buyers out there, but it seems to be shrinking. We even had one buyer walk on us, and it appeared to be primarily over the coronavirus and its economic fallout.

CNBC reports that home sales could fall 35 percent from what they were last spring! That would make for approximately 2 million fewer home sales. Basically, demand has tanked during this crisis

Of course, if this is a “V-shaped recovery” (which economists are saying is less and less likely by the day), in all odds, the housing market will bounce right back.

Even if it’s not such a sharp recovery, though, whenever this pandemic does end, there will be at least some pent-up demand. So, sales should increase substantially then (although prices will likely be lower than they were in February). When exactly that will be is, however, another question entirely.

For the time being, my recommendation would be to wait on properties that you can wait on. If you have the choice between renting and selling, renting would probably be the better option right now. Yes, if it’s a high-end flip, you’ll likely have to brave the market. But for properties you can hold off on or rent, go that route for now.

For what it’s worth, my company has had almost no drop-off in leasing over the past month.

Should You Buy?

As slimy as it sounds, crises come with opportunities. Warren Buffett, for example, made much of his fortune striking during recessions when assets could be bought on the cheap.

foreclosure-us-markets

At this time though, I would be very cautious. Interest rates may be cheap, but we simply have no idea how serious this will be and how long it will last. Thereby, it’s best to move prudently and buy more aggressively once the dust has settled.

That being said, there is no reason to turn down great opportunities if they come along. I would just add an extra contingency due to the added risk and uncertainty. If normally you would only buy at 70 percent market value, make it 65 or 60 percent—at least until the economic picture becomes more clear.

Should You Refinance?

I’ve always stressed the importance of keeping strong cash reserves to weather crises and make the most of the opportunities that come up. That being said, it’s not the easiest thing to do for real estate investors, especially in the early going. But if there’s a way to build up those cash reserves now, it’s strongly worth considering.

In the past, I’ve explained that there are three good reasons to refinance, those being:

  1. As part of a strategy
  2. To improve rates/terms
  3. To pull out equity

Right now, both No. 2 and No. 3 would make some sense.

Real estate values are likely going down, but the most important thing right now is liquidity. It’s critical to have cash in case your cash flow is significantly reduced as unemployment makes it impossible for some tenants to pay rent. So pulling out some equity now to increase your cash reserves is likely a good idea as long as it doesn’t substantially increase your overall mortgage payment.

Related: Recession Prep 101: Investing in Real Estate During a Financial Crisis

Speaking of which, with rates as low as they are, it may be possible to take out a sizeable chunk of equity and actually reduce your payment or at least tread water. Investopedia recommends that: “It may be wise to refinance if you can lower your interest rate by 1% or more.”

With the benchmark rate at zero, that is likely possible for many.

Again, getting a loan in this environment will be more difficult, but that doesn’t mean it’s impossible by any means. This is another reason it’s important to build relationships with multiple banks. When the going gets tough, some may keep their money sheltered in place, while others will still want to lend. And they’ll particularly want to lend to those they have relationships with.

So going forward, don’t just settle for one banking relationship.

Conclusion

Interest rates are at historic lows and while banks are still hesitant to lend, for many it will be worth trying to provide extra cash reserves and reduce interest rates. Selling right now will be difficult and buying should be done cautiously until the long-term economic consequences of the coronavirus become more apparent.

If nothing else, we certainly live in interesting times.

Recession-Proof Real Estate book blog ad

Questions? Comments?

Join the discussion below.

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip ...
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    Sasha Fukuda from Walpole, New Hampshire
    Replied 6 months ago
    I was going to do a refinance. The mortgage officer said i could do an 80% cash out refinance. Then the bank changed it's policy and said it could only do a 70% cash out. I then went to another bank who'd said they could do an 80% cash out refinance, but this one had also changed it's policy and could only do an 80% non cash out refinance. I'm still going to try to refinance to improve my interest rate, but pulling out equity just seems very hard right now. The banks are trying to hang onto their cash.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 6 months ago
    Yeah, I have started to hear about that too. On another loan we were trying to get through, the bank just dropped the LTV so we backed out. Rates are good, but banks are also being very, very cautious.
    Al Diaz Investor from West Orange, NJ
    Replied 6 months ago
    Thanks for posting this. Very informative!
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 6 months ago
    Sure thing Al, I'm glad you found it helpful!
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied 6 months ago
    Another good one, Andrew. Thank you👍
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 6 months ago
    Thanks Steve!
    Shea Bartolino New to Real Estate from San Diego, CA
    Replied 6 months ago
    Very informative, thank you!
    Deryk Harper Residential Real Estate Broker from Alpharetta, Georgia
    Replied 6 months ago
    Below from a top lender in our area: Realtors Beware: The Coronavirus Has Created a Mortgage Crisis Mortgage lenders and their loan products are disappearing from the market at an alarming pace (seemingly faster than the Great Recession). Most of the nuances behind why this is happening are irrelevant, but it is vital every Realtor understands the basics and uses that knowledge to protect their clients during this mortgage crisis. A PERFECT STORM What we are seeing behind the scenes in the mortgage markets today is truly a perfect storm. Interest rates have hit their all-time lows, and most lenders’ pipelines have reached their highest levels ever. Simultaneously, extreme interest rate volatility on a daily basis has resulted in margin calls and has left many mortgage lenders vulnerable and undercapitalized. Some of the actions taken by the Federal Reserve – like its buying of mortgage-backed securities – are accelerating the chaos and causing drastically more harm than good. Unfortunately, the situation is not getting any better and is unlikely to improve until the Federal Reserve ceases its purchases of mortgage-backed securities. HOW THE MORTGAGE MARKET (SHOULD) WORK Most Realtors are educated on how the mortgage process works on the front end, and they possess more than enough knowledge to carefully guide their clients through it. Few, however, understand how the mortgage market works after the loan closes. We call this the secondary market, and it’s this market that is experiencing extreme chaos at the moment. Let’s start at the beginning of the home-buying process. A client takes out a mortgage from a lender who has underwritten, approved, and funded the loan. The loan is then released into servicing, bundled with similar mortgage loans, and sold to mutual funds, insurance plans, and retirement accounts as a mortgage-backed security. The servicer of the mortgage typically does not own the loan; they simply manage it and make sure the monthly payments come in and the taxes and insurance are paid. Those monthly payments are ultimately passed on to whoever purchased the mortgage-backed security. The function the mortgage servicer fulfills is crucial. Without it, the mortgage and real estate industries dry up and cease to function properly. Typically, the servicer pays the lender about 1% of the loan amount to obtain the servicing rights for a loan. In return, the servicer earns roughly .3% of their investment per year. This results in a typical break-even period of three years; each year the loan stays with the servicer beyond that is profit. With interest rates hitting all-time lows, the industry is seeing massive waves of refinances. These refinances shorten the average lifespan of a loan below the three-year break-even point. The result of this rapid churning of loans is a drastically reduced value of the servicer’s loan portfolio. As the servicer’s asset value decreases, so does its ability to obtain financing and lines of credit needed to purchase new loans. This ultimately results in more margin calls and a massive liquidity crunch for the servicer. IT GETS EVEN WORSE As loan servicers are experiencing a liquidity crunch due to all the refinance action, the coronavirus has created record unemployment numbers. This adds additional risk to the servicer because, even though they do not “own” the mortgage, the terms in the servicing agreement holds the servicer responsible to pay the investor who owns the mortgage-backed security, regardless of the receipt of the mortgage payment. Typically, the servicer has plenty of capital to make its payment to the investor who purchased the mortgage, and there are no issues. However, thanks to today’s rapid refinancing numbers, the devaluation of their servicing portfolio, and a rising number of borrowers who are requesting payment forbearance, mortgage servicers find themselves dangerously short on liquidity. This liquidity crunch in servicing has begun to impact borrowers and forced lenders to re-evaluate what loans they should approve. No longer is the consideration only going to be if the loan can get an Automated Underwriting approval – the mortgage industry now has to ask if the client getting the mortgage is likely to make the first payment. Lenders are going to be evaluating if the borrower has sufficient liquid reserves after closing and whether or not the industry the borrower works in is likely to be cutting its workforce. In summary, the liquidity crunch in the secondary market is beginning to have an impact on what loans will be approved or declined by mortgage lenders across the country. LENDERS ARE EXPERIENCING LIQUIDITY PROBLEMS TOO Like I mentioned previously, the Federal Reserve was swift in its response to the coronavirus crisis by announcing virtually limitless amounts of stimulus. It has aggressively been buying Treasury bonds and mortgage-backed securities in an attempt to reduce long-term interest rates. On the surface, this is a great play – lower interest rates should help stimulate the economy by increasing demand for housing. However, there are significant and unintended consequences of the Federal Reserve’s buying of mortgage-backed securities. These consequences are now causing liquidity problems for lenders and ultimately making it harder for borrowers to obtain financing. When a mortgage company locks a borrower’s interest rate, it is promising to reserve a block of money at that rate for a specified number of days. For example, let’s say your client locked in at a 3.5% interest rate for forty-five days, but between the lock date and closing date, the interest rate market moved to 4.0%. In this scenario, the lender would need to buy down the interest rate because the market moved before the loan was able to close and be sold. To protect themselves from scenarios like this, lenders hedge their locked loan pipeline. This hedge provides the lender protection against the interest rate market moving higher before the loan can close. Essentially, if a client has locked their loan and the interest rate market moves higher, the lender still has to buy the interest rate down, but they make up the difference by profiting from their hedge position. In a normal market, this is a low-risk strategy that allows lenders to lock loans without taking on excessive rate-movement risk. Due to the Federal Reserve’s intense investment in the mortgage-backed security market, interest rates are at an all-time low. As rates moved lower the lender’s potential profit would increase on the locked loans, but put their hedge positions at significant losses. In the end, everything would even out because the two positions offset one another. Unfortunately, the financial institutions (called broker-dealers) that provide the hedge position for lenders have very little patience; and when the lender’s hedge positions show deep losses, they enforce margin calls. Lenders have seen intense margin calls resulting from upside-down hedge positions on their locked pipelines. We are talking numbers in the tens and, in the case of some of the bigger lenders, hundreds of millions of dollars. Many lenders will not be able to fund these margin calls, some have stopped taking or honoring rate-lock agreements with their clients, and some will disappear forever. How Should You Advise Your Clients During the Coronavirus Crisis? The mortgage and financial markets are under massive stress due to the coronavirus and the ensuing liquidity crunch in many areas of the economy. The result of this is going to be tighter underwriting guidelines in the mortgage market. There will be some clients who may have qualified for financing just days or weeks ago, but are no longer eligible today. Clients with low credit scores, high debt-to-income ratios, minimal reserves, and unique circumstances are going to be the hardest hit by this new reality. If your clients are not picture-perfect for their financing, it is going to be increasingly difficult to obtain underwriting approval. Some potential buyers are going to need to sit on the sidelines for a few months while the market regulates and we get over the coronavirus caused crisis. You should also be aware of potential underwriting delays and extended closing timelines for your clients. We are seeing some banks posting forty-five to ninety-day turn times for underwriting due to all the refinance volume moving through the markets. As always, use your most-trusted lenders. If things seem to be going off track, work on a backup solution quickly. Underwriting guidelines and loan programs are changing on a daily basis, and an increasingly chaotic loan process is likely to continue until we see unemployment numbers dropping and people going back to work. We are confident that we will get through this crisis, as a nation, one day at a time. If you have any questions about the mortgage market or have a current scenario you would like to discuss, please don’t hesitate to reach out.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 5 months ago
    Very interesting, thanks for sharing!
    David Rodick
    Replied 6 months ago
    Dude. Paragraphs.
    Derrick Atkinson Investor from Philadelphia, Pennsylvania
    Replied 6 months ago
    @Deryk Harper Hello Thank You, this is very helpful and relatable. I have a client who pre-Qualed but then had to amend the 2018 & 19 tax returns. My client got the taxes amended and sealed the first week of March. My lender said everything looked good and we would most likely have a settlement the first week of April. My lender contacts me last Tuesday advising me that the underwriter will not approve the loan without having the updated amended 18 & 19 4506T tax transcripts in the file. My client and I were completely blind sided and very disappointed to say the least. It’s still kind of confusing because if it shows that the taxes were filed and sealed and in processing, why couldn’t the mortgage co just get the transcripts once they’re produced?, I’m not sure if I asking correctly but I would be greatful to discuss with you further to get a better understanding?, I know these are unprecedented times but it just seems to be a little confusing.
    Derrick Atkinson Investor from Philadelphia, Pennsylvania
    Replied 6 months ago
    Hello Thank You, this is very helpful and relatable. I have a client who pre-Qualed but then had to amend the 2018 & 19 tax returns. My client got the taxes amended and sealed the first week of March. My lender said everything looked good and we would most likely have a settlement the first week of April. My lender contacts me last Tuesday advising me that the underwriter will not approve the loan without having the updated amended 18 & 19 4506T tax transcripts in the file. My client and I were completely blind sided and very disappointed to say the least. It’s still kind of confusing because if it shows that the taxes were filed and sealed and in processing, why couldn’t the mortgage co just get the transcripts once they’re produced?, I’m not sure if Im asking correctly but I would be greatful to discuss with you further to get a better understanding?, I know these are unprecedented times but it just seems to be a little confusing.
    Wayne Smith Information Technology from Wilmington, DE
    Replied 5 months ago
    @Derrick Atkinson Pull a 4506T from the IRS site... It is for the lender to acquire tax document from the borrower... Not a big deal...
    Kirsten Braddock Investor from Ponte Vedra, Florida
    Replied 6 months ago
    Thanks for sharing this info.
    Christian Alessandro from Phoenix, Arizona
    Replied 6 months ago
    Thanks very much, Deryk! This was super informative and helpful for revamping our strategies and getting a glimpse into the future. Much appreciated.
    Daniel Peavey from Atlanta, GA
    Replied 6 months ago
    Super smart guy! Great article? Question? Why is a mortgage servicer have to pay the actual owner of the mortgage? I would think they are only servicing loan for a fee?? If loan is in default, does the servicer have the responsibility to pay the owner of mortgage?? Hence, the borrowing of large sums of capital??
    Ekow Essel New to Real Estate from Oakland, CA
    Replied 6 months ago
    Wonderful analysis and super informative. Thank you very much
    Fernando Martin-Gullans New to Real Estate from Houston, TX
    Replied 6 months ago
    Man, oh man, was that interesting. Thanks for sharing.
    AJ Patel
    Replied 6 months ago
    Deryk, very informative!
    Christopher Helwig
    Replied 6 months ago
    Thanks for the article. It was clear and level headed. It helped me clarify some of the things I have been thinking about regarding my strategy through this crisis.
    James Runkle Rental Property Investor from Crestline, CA
    Replied 6 months ago
    Thanks for that. Things aren't always as they may appear to be in the mortgage industry.
    Mark H Murdock New to Real Estate from Pittsburgh, PA
    Replied 6 months ago
    Newer on this website, forgive my naivete; are those real numbers? Some people's threshold for buying a property is 70% of market value but it's possible to find houses at even 65 or 60%? That seems like an amazing deal to me, how do you find deals like that??
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 6 months ago
    Our threshold is 75%, so we're looking for closer to 70% now. I think you're safe at 70%, at least that's my opinion.
    Sebastian Keith
    Replied 6 months ago
    Thank you Andrew, Informative indeed. My wife and I just recently refinanced our home from 4.95% to 3.65%. We were able to do a cashout refi up to 80% LTV. Normally I would have never done this...typically I would have just applied for a HELOC. I wanted to be sitting on as much liquidity as possible in order as I feel we have hit the peak in just about every market (we're in the Boise, ID market). We also put the house loan into my wife's name alone so that if we were to lose the house due to this massive downturn that one of our credit scores stays intact.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 6 months ago
    3.65% at 80% LTV... Damn! Well done!
    Mark Tinawi Rental Property Investor from Irvine, California
    Replied 6 months ago
    Good article, thx for sharing. Does it make sense to get an home equity line of credit while homes are relatively high with the current rates?
    George Lui Investor from Palo Alto, CA
    Replied 6 months ago
    Great post! I appreciate it!