1424: When Tenants Can't Pay, COVID-19 Baby Boom, Decline of China, Trump Takes Over The Fed, Mortgage Update

If you're that kind of person and you've got the capital and you're a.

Great negotiator, you've got great people skills.

You could probably be a successful flipper. But it's like a job, right?

If you're not flipping, you're not making money. And that's why I prefer income property.

Because you just make money every month.

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to episode 1424. 1424. We have got our mortgage update today for part two of this show. You're definitely gonna wanna hear that. There's obviously a lot, a lot, a lot, a lot going on in the credit markets. There's a lot going on everywhere. You know, it's funny folks, I gotta, people are saying to me, well, you know, they occasionally say something, well, Jason, are you relaxing a little bit because you're not traveling anywhere or you're at home all the time. Oh, yeah, that's a nice myth, folks. I'm busier than ever. There is so much to cover. Remember, we are in the media business and there's an awful lot of news nowadays, as you all know, and assimilating it, bringing it to you, sifting what's important, what's not. It is a, it is a big job. But here we are and I'm grateful to have the opportunity to do it. And I'm also grateful to have Drew Baker, our client who's been on the show many times here today. And as we have rents due today, the rent is due and many tenants are not going to pay. Now here's the thing. Tenants tend to not have as much information as landlords do most of the time, at least not landlords that are listening to this show. So most of them are, are going to pay their rent, but some won't. And hey, you can't really blame them. These are extraordinary Times and usually, you know, with your tenant you've got to kind of take a bit of a hard line. You've got to sort of have draw boundaries and make them stay healthy. Because once you sort of breach that line, then tenants no longer respect it. But we are living in extraordinary times and it calls for something different. And this is the time to adjust our strategies as landlords and work on that. So Drew's here to talk about that. We have some comments on the general economy. Drew, how's it going?

Hey, Jason. Yeah, I reached out to you because I thought that it was interesting after getting a message from one of my tenants saying that they were not going to pay rent. I sort of suspected there would be a fallout. And that was one of the responsible ones that told me they're not going to be able to pay.

That's nice of them. They reached out to you. And by the way, you, you know, you've all heard Drew before talking about self management. He's been self managing for about two years now. And I think this is really one of the other great things about self management. Your tenant is going to treat you like a human and you should treat them like a human. They are your customer after all. You know, remember, the customer is always who's paying you. Right. So anyway, this really is a good. You have a much better bond with the tenant when you don't have a property manager when you're self managing. So I think this will go a lot better for those self managers out there. But what did they say when they reached out to you? Now, this is just one of your tenants. You've got many properties, but this one.

In particular, one of the tenants reached out and said, hey, I just want to let you know that we're safe here. Hope you guys are doing well in California. We're still unfortunately in California.

That's meaning you, not the tenant.

Yes. And they just wanted to write and let me know that the COVID 19 is affecting their income. They won't be able to pay rent this month. Anticipate they'll be able to start paying rent again May 1. They said just reach out if I had any questions. Well, I started sort of pecking at the little iPhone keyboard, sort of trying to figure out the right thing to say. And I just said, you know what, I'm just going to call them. Anything I say is going to come across as insensitive or could possibly get misconstrued. And I also don't want to say something that might be in writing that I Might sort of not want to have it be used as a weapon against me if it's seen in a different light than it's intended.

If you have to go to court at some point and do that. Yeah, this is. Look, folks, we were built to talk. I think communication has gone down the tubes since we started using text based communication about 25 years ago when email really got popular. I think communication has become largely a disaster. People are not good at expressing themselves with the written word. Some are, but not many. And also there's a lot of data in voice communication that does not exist in text based communication. Now, text based communication obviously has its place when you want to do something highly technical or you want to preserve something for the legal record or for posterity. So it has its place. But mostly we were built to talk. You know, God gave us mouths and ears and that's how we were designed to talk. Writing came much later. It's a man made invention. So you called them up and what happened?

Yeah, so I was talking to the tenant. We were trying to figure out sort of a good situation. I told him, hey, listen, this is a team effort for this short period of time and we're doing okay here in California. I hope your family's doing well over there. I said, here's the difficulty is if I have expenses associated with my house over here and I have expenses associated with your house over there, and if we're not making any effort towards working together towards covering those bills, I'm sort of having to go and reach over and take care of that. And it's a strain on us over here. So I said, let's try to work together if you can make some payment. He said, of course I can't pay till May. And I said, hey, if we can make some effort to pay. I didn't even say an amount. My wife said, maybe you should say, heck, can you pay half? I didn't even say an amount. I just said, pay what you can, please help out. Of course he understood. He was reasonable and he offered to pay 75% of the month's rent, which I was shocked, but I gladly accepted and said, hey, I'll waive the late fees. There's not going to be any late fees associated with this, but try to see if you can do what you can in the next couple months. We'll reassess as each month goes on. So that went well for that. Now I am worried about what's going to happen with regards to my other tenants that aren't so responsible. As to give me a heads up, even though this was two days before, but March, people worked two weeks out of the month before this all went to hell. So I don't know what's going to happen in May.

None of us do.

I don't see this situation for someone that's sort of in a starter home situation in some cases. I don't see that situation getting better in May. So I just really wanted to stress to them, like, hey, we got to put our best foot forward and I don't want it if it gets worse. I don't want to push a little forward here while we can in this month. So I kind of reached out to you and wanted to get your thoughts on, like, being compassionate.

Yeah, I think that's a good question, Drew. I think this is the time to practice compassion. And, you know, it's kind of funny the way we think as humans. You know, we'll give money to charity, but then when it comes to our own business or our own tenants, we don't give there. You know, it's just kind of an odd thing, and I'm making a massive generalization. Of course, you know, there are several things you can do. You could agree to do a forbearance, which is what your lender is going to do for you. If you go to the lender and play the game of hot potato, which, by the way, I recommend, you know, the lenders are doing bailouts and they'll easily give a 90 day forbearance if you just ask for it. And all you have to say is due to economic circumstances, literally, that's. And they don't ask you to provide any documents or anything. Although I will say, when you go to your lender, get that in writing. You must have some document from them. They're not supposed to do any negative credit reporting or anything, but they'll let your loan slide for 90 days. That's pretty much the universal thing. Maybe up to a year. Okay. And then just tack it onto the back of the loan. You can do a forbearance with the tenant. You could just provide free rent and, you know, if they lost their job, you could just do something charitable. Of course that'll reduce your income tax burden, so it is deductible. Remember, the government is your partner in all of this. Or you could reduce the rent. Maybe you had $300 a month, positive cash flow. You could reduce it by $300. Remember, the tenant is not totally down and out. They are getting a $1,200 bailout check. And then if they have kids, they're going to get $500 for each kid. And if they're two adults, they're going to get $1,200 each. That's most likely what will happen. That'll just appear in their bank account. So remember, if they lost their job, they're not getting zero. Okay. The most likely scenario is they're getting something from the government or they're getting some severance from their employer or the payment doesn't cut off right away. So you could offer, you know, essentially like an emergency repayment program. You could ask them to pay with a credit card. Okay. If you have a merchant processing account, which by the way is very easy to get through Square or stripe, it's very easy to get a merchant processing account just as an individual person. You know, you've all seen if you.

Subscribe to Buildium's ePay, there is an option for your tenants pay by credit card through that service.

Right.

I just never have done that because I don't want the charge back to situation and having to fight that out. But I think that it's better than nothing.

I agree. I agree. So you've talked before on the show how you subscribe to Bilbium and you do that basic minimum account that I think is like $40 a month to use their software just to manage your own properties. Now that's a software that a lot of big property management companies use also. But it's great that you use it and I know you looked at them and talked about that on a prior episode. So we won't go into that today. But it has a credit card processing option. You can government programs created for landlords and renters, like Section 8, you know, they could jump onto a government assisted program. You could offer your units free to volunteers or healthcare workers. That's another charitable thing you could do. You could just be in touch like you've talked about with these renters who can't pay the rent. You could ask them or you could go get a rent insurance policy and those are available. They're becoming a lot more of interest today. And you got. There are many companies that offer it. Check them out. We've had a couple on the shows over the years. You could offer to split up the payments and have like a sort of a layaway repayment plan. Pay me something this month and then let's add $100 to the rent next month and the month after to sort of pay it off. You could do a one time only discount Maybe for early payment or something. And if they're handy and drew, you've done great at this. You could trade them for working on the house. Okay. Heck, they're home, they don't have anything to do. And you know, some of you listening to this literally have contractors renting from you, living in your units. Maybe they could fix up the house and you could offer them a trade. Okay. So there's lots of creative options, but just remember, this is the time when you need to be more creative and you also need to be more understanding. Normally we would say, look, you got to be kind of strict with your tenant, but this is not the time for that. This is the time to talk, to work things out, to be creative. And things will work out well for all parties.

Yeah, I mean, the benefit of having the self management thing is you kind of have a little bit more of a direct pulse on what's going on with tenant. And I think the thing that my first perception of this was that there's gonna be a moral hazard of everyone going like, hey, there will be. Everybody's not paying their rent, so I'm not gonna pay it either.

And you don't have to pay your mortgage.

So, yeah, they're not gonna evict me because they're not doing any evictions.

Right, right, right. And remember, most tenants don't know this. They're not paying attention to this kind of news. Okay? The word will get out. But they don't all know this, so don't think that they do. The moral hazard concept is really a game of what I call trickle up economics. And I saw this happen during the Great Recession. You know, first it starts with someone not paying their rent, and then that landlord in commercial or residential property says, hey, lender, I can't pay you. I can't pay the mortgage. And then that lender goes to the government and says, we need a bailout. Or they default on their bondholders and their bondholders say, we need a bailout. So it's trickle up economics as opposed to trickle down economics that you've all heard of, of course. Okay, so it's a pretty crazy interesting time, but we're going to see more of this, so just be prepared. This month is sort of a very important month for the economy. Most of our podcasts are pretty evergreen and we can replay them on Flashback Friday because the same rules that applied 10 years ago apply today. But what we're in right now is a very, very unusual time. By the way, a couple news items here FHA has now NVA government sponsored loans or government insured loans have now joined the government sponsored entities, Fannie Mae and Freddie Mac in relaxing their lending standards. Okay? Coming out of The Great Recession, 10, 12 years ago, depending on how you count it, you know, most of us said that, look, the banks have overcorrected, they're being too strict, okay? And now they're going to sow the seed of the next mortgage crisis because they've now all relaxed the standards. How much have they relaxed? I don't exactly know and don't have time to get into the details anyway. It's probably not that important. But if it goes on too long and it's not just a temporary thing, it could lead to, to the next mortgage meltdown in seven years. So just remember I said that here in 2020. Okay? Also, another news item I want to share with you, and this is from a government consultant, okay, on Twitter who did work for the Communist Party of China, the Chinese government, okay, the ccp. And he said, he said this in his tweet. This is Tony Nash, by the way. I don't know if he's been on the show, I can't remember, but he said it's actually incredible how quickly China's role in the world has changed. Nobody trusts China anymore. Nobody will invest in China anymore. Nobody wants to be in China anymore. And this will hurt all of Asia, not just China. By the way, Drew, I noticed you liked that post when I posted it in our private content group.

So true. It's so true. I mean, Trump really set this up. I mean, Trump has his downside, but no one was paying attention to China and sort of the abuses that were going on there.

And the liberals kept hammering Trump on the trade war. The trade war. And he wanted to bring jobs back to the U.S. well, I think he's going to get his way now because businesses do not want to have all their eggs in one basket, okay? They've seen their supply chain disrupted. We've talked on prior episodes about the coming supply demand shock and my predict that we're going to come out of this with a stagflationary environment. And that's pretty miserable for most people. It won't be miserable to those of you listening to the show because you're going to know how to combat it, and you already do because we have inflation induced debt destruction and so forth. But it's, it's pretty interesting what's going on. We finally learned that, guess what? Countries need some degree of autonomy. They need borders and they need fair trade and companies need to manufacture onshore. We cannot have this situation where China could withhold antibiotics because they're trying to get something in the trade war from Americans. Okay? We just cannot have this. You cannot outsource everything, especially critical things. Some things, sure. Outsource it. That's great. I like free trade as much as the next guy, but there are limits to that philosophical idea. So interesting. Drew, I got to ask you a question. Do you think this is interesting? Because it could go one of many ways, but some have predicted that nine months from now, there's going to be a mini baby boom because everybody's at home with nothing to do. So what do they do? They either get in fights and arguments or they jump in bed and make a baby. So what do you think is going to happen? You know, is the divorce rate going to increase now that people are getting cabin fever and arguing, or is there going to be a baby boom? Or maybe both. But either way, investors, it means a greater need for housing. If you have another kid or two, you need a bigger house, or you need to get out of that apartment, or if you get in big arguments and you get a divorce, then you need two houses rather than one. So either way, you increase the need for housing. Go ahead.

Statistically, I doubt it will make a big difference either way, because I think having the economy be shattered is different than just people are going to be less likely to want to have another kid. And that financial burden when you come back from World War II and the economy is starting to just start to go. But nine months from now, who knows? The thing I think that could be interesting is when you start to diversify the supply chain and maybe you bring some of that stuff back home. It will cause a bit of a renaissance, and anything's possible.

I have read articles, by the way, on this note. I had to bring it up that there is a looming shortage of condoms. I'm guessing a lot of those must be made in China. I did not know this until I saw a couple articles about it. So maybe there will be a baby boom accidentally. Who knows? Yeah, it's. It's. It's pretty interesting. We'll. We'll see. We'll see. So nine months will tell. Also, another interesting tweet, by the way. And. And then we'll get to part two of today's episode. But rip to the Federal Reserve. Okay? And this is IR on Belly. Okay. On Twitter, whoever that is. I don't know who it is. Okay. This is huge. The scheme essentially merges the Fed and the treasury into one organization. So meet your new Federal Reserve chairman, Donald J. Trump. And you know, Trump has spoken out about the Fed. He doesn't like the Fed. Okay. And the last president that I know of that really spoke out against the Fed was John F. Kennedy and he was assassinated. So you don't wanna speak out against the Fed. But yeah, that's pretty interest.

You know, Jason, I want to ask you something. The thing I think is it just kind of dawned on me about how this is like such a huge event in society that will, this is a hundred year event.

This is the biggest news story of the last century right now.

And I mean, you know, I feel like in every conversation you're talking, you know, they joke about how every conversation ends up going back to Hitler, you know, or it seems like every conversation goes back to terrorism or goes back to 2008 or goes back to, you know, the dot com bubble. I mean this is going to be one of those events that sort of brought up and remembered oh yeah, for.

A long time this by the way. And we're going to get into this and you know, I'm going to make my presentation on pandemic investing available to all the listeners. So stay tuned for that. The problem is I can't finish the darn thing. I thought it was finished and, and I presented it a couple of times to a couple of groups and then I have to keep adding to it because so much keeps changing. But this is a generational shift, folks, I'm telling you, things have changed essentially forever. When I say that, I mean for generation and that's about 25 years, give or take. Public gatherings, just everything has changed. You're going to see a reversion to simpler lifestyle in many ways. You're going to see a new focus on maybe what's more important in life. You're going to see a new kind of interesting focus on a different kind of environmentalism. Maybe one I actually agree with a little more than the past sort of communistic environmentalism that we've had. I'm just telling you things are changing radically. But most of all for investors, a mass migration coming toward lower density housing. And guess what? For the past 16 years, that's what I've been helping all of you invest in lower density suburban style housing. There is going to be a huge migration toward that when this blows over and people in places like New York City and high density la, they want out. Okay? And I am sure I am right about this. I've never been so sure about any predictions as I am about this one. And by the way, if you haven't heard my episodes on it, on this show or the holistic survival show, look up UN agenda 21, okay? Which means 21st century of how the United nations has this sort of global agenda to push people into higher density environments. Well, there's going to be a real mood against that kind of thing, so just look that up. There's some conspiratorial aspects, but it's pretty interesting either way.

There's definitely, I mean, you know, it seems like for the last decade there's been this push towards investing in downtowns and the young people, you know, getting the old Nabisco factory retrofitted into these single lofts.

Yeah, cool.

Lofts downtown. And I think you're going to see a bit of an unraveling of that. And you're right. Suburban sprawl and sort of investing more in that area. So giving people a little more space is definitely going to be a good place to be.

Yeah, that's where your money is, listeners. And good for you. I have many friends that own a lot of high density apartment units that kind of thought they were too good to invest in single family homes. And they said, well, no, I only do commercial real estate. I'm a big wig. Guess what? The home has proven to be the undisputed center of the universe. And guess what? Everybody has become much more tech savvy. And I don't mean high tech, I just mean now they've people like my mother who could probably never before this use Zoom or Skype. Okay? She did use FaceTime on her iPhone. Now they're seeing that you can do things remotely. And guess what else? The emperor has no clothes. And that is going to be the university system. The emperor has no clothes. Because now all of those kids have been told, go do go take your college classes online. And guess what? There's a university not too far from where I live. I go there once in a while to throw the ball to my dog. And I just look around and I think all these buildings, this campus is totally empty right now. And all of these buildings, I don't think they'll ever be repopulated. I just think that it's an absolute sea change. And the way colleges have been just overcharging people for decades now, that's over. Because suddenly if people can't have a college experience the same way, and it's just online learning, which is infinitely scalable, they're not going to pay the price. Thankfully, they've woken up, they've realized the emperor has no clothes. And there's a lot of good stuff that's going to come out of this, folks. I know it's a hard time now and I hope everybody's safe. Well, but a lot of, a lot of silver linings in this dark cloud. So we'll get through it. And Drew, thanks for being on with us today. We got to play a little segment before we go for part two of the the episode today, but thanks again for joining us.

Welcome to this edition of the Mortgage Minutes. We are joined by one of the lenders from Jason's network. We decided we needed to do this because there's a whole lot of stuff going on in the world actually these days and investors want to know what mortgage rates are looking like. So what are mortgage rates looking like right now?

Thanks, Adam. Let me give a brief history of what's happened in the last couple of weeks. Traditionally, the mortgage market would move in tandem with the 10 year yield. And note as that goes up and down, mortgage rates tend to follow that for the most part, mortgage backed securities would be traded up and down similarly to how that yield that 10 year yields trades. What we saw was a huge massive sell off in the stock market with fears of the coronavirus growing around the world. To the degree that the natural market movement and reaction of the market followed suit and we got mortgage rates down to historic lows, a lot of people were able to refinance to those loans to those low rates and to a degree hit lightning in a bottle because you have typically you got like the mortgage market is an $11 trillion business or industry. If you look at a normal year, the mortgage industry across the country can handle about $3 trillion of mortgages in a good year, maybe 50% purchase and 50% refinance. So when you have four or five trillion dollars worth of business or mortgages trying to refinance to historic lows all in one month, lenders reach capacity pretty quickly. There becomes a floor to the market regardless of what the market does. So subsequently the Fed goes to zero. The ten year yield trades down to less than a half percent. But mortgage rates hit a floor and we saw that floor. Folks were able to refinance again to a degree, hit lightning in a bottle before market rates started to rise again. Part of that reason why rates started to go up was lenders hit capacity and started to artificially price the loans higher to stop volume coming in or price loans at 90 day and 120 day lot periods which lead to higher interest rates because you're protecting the rate for longer now. Coupled with that, you had the Fed come in and inject $1.5 trillion into the economy and lower the fed funds rate a half a point at the time. Now that $1.5 trillion had no zero of that money was earmarked for mortgage backed security purchases. So there was a massive sell off in mortgage backed securities across the economy, across the marketplace, which led to higher interest rates. So you had lenders at capacity and you had mortgage backed securities being sold off at a tremendous rate which all led to higher interest rates because they found out they didn't have any buyers to buy mortgage backed securities. Now China being one of the largest purchasers of mortgage debt, of long term debt obviously on lockdown as well, has stopped purchasing mortgage backed securities for the time being. Other sovereign nations are on hold in terms of buying mortgage backed securities. So the Fed comes in last Sunday and offer puts another 700 billion into the economy, 200 billion of which was earmarked to purchase mortgage backed securities, which kind of stemmed the tide a little bit of rates going higher. However, it didn't really give too much confidence to the market last week and we saw rates to a degree, the lenders to a degree be uncertain on where to price their mortgage rates this week. This morning we're looking to see some normalcy. I suppose lenders are still very, very wary of where the market can go. The Fed is buying mortgage backed securities so that stabilized that a little bit. And we're seeing rates kind of return to somewhat of a normal level. But for our folks, for our clients, for the investment property investors and guys who have multiple properties under management, maybe at rates like 5, 5.5% and looking to refinance, that market really has again, we missed that market because it was so fleeting and rates are very similar to where they are when you purchased a home maybe 18 months ago. So we are seeing rates right now hovering around 4.75 or even 5% with 25% equity or 75% loan to value on a purchase deal. We're seeing rates around 4.5% right now. So that's pretty good compared to last week when these rates were about a point higher due to the uncertainty.

In the lender world, it all matters on. You said it's gone up since then, but I mean you were able to get rates below 4 not that long ago and that's just incredible. So when you say it's gone up, it's really just gone up. To reasonable levels.

It went up over 5 last week. It's kind of normal. We think it's going to stabilize. We think obviously we're going to be heading into a global recession here with COVID 19. We don't know how long that's going to be. So in the natural market again, when we hit a recessionary period, mortgage backed securities, when they're being purchased in a normal fashion, when they're trading in a normal fashion, mortgage interest rates will go down, they will normalize and they will will trend down because of the recessionary nature of the economy. So what we're anticipating right now is kind of like an unknown. It's kind of unprecedented. Some markets are reacting, some are not. The Fed is kind of beefing up purchases and mortgage backed securities, which is absolutely helping stabilize things. So we anticipate that rates will improve. So as it relates to the folks out there who may be under contract and are just seeing rates kind of a little bit higher than they would have anticipated, what we're doing is we're generally floating everything right now. We're getting everything underwritten, we're getting everything approved, collecting all the necessary documentation forever for underwriting approval. But we're floating the interest rate with a view that that interest rate will be lower and move in a more normal method or more normal transactional way once we, you know, just realize the recessionary nature of the economy. So prior to closing, we would probably lock in a lower rate than what we would have floating today just because of that recessionary nature. So that's kind of what we're looking at. I'm just trying to explain why all the calls we got last week for refinancing people were surprised their rates were so high.

Yeah. So one thing I've heard from a lender friend of mine was that there's a big spread right now, or at least there was recently, between 20 and 25% down. Like it was bigger than it usually is. Did you see that? And kind of. Is there still? I mean, it was like a 1% spread. Spread between the two. Are you seeing something like that still?

Yeah, I mean, on the normal market that's probably about a half a point three eight to a half a point difference in rate between 20 and 25% down. Last week we were seeing about a point. I think this morning I priced 1 out 20 versus 25 and it was about a 3/4 of a point or a 5,8 of a point difference in that rate spread between 25 and 20% down. So it's Normalizing, it's coming back to kind of typical, typical fashion or the spread that we would normally see between those two down payment options. You're certainly going to see a little bit better in rates for purchase money as opposed to refinance money. Bull spreads. The differential there is still a little exacerbated. You know a 25% on purchase at 4.5% today, if that was the same equity position for a rate and term refinance, same size loan, investment property, single family, it's probably about a half a point higher in rate today. So, so that spread is still a little bit exacerbated and hasn't really normalized but we do anticipate it that it will. So I think Fannie and Freddie are still getting a grip on what the Fed action has taken, what the stock market is doing. All of that has an impact on rates, but not one of the reactions in the market will dictate where rates go other than who's purchasing mortgage backed securities.

Now.

Now one more thing I will add to this conversation I suppose is typical unemployment figures or unemployment claims on a weekly basis hover around 600,000 every week. Goldman Sachs came out last week and predicted that unemployment claims this week will rise up to 2.25 million. But that does put pressure on rates because the perception of risk when we're lenders are pricing rates out is to cover or to anticipate mortgage default due to temporary or long term unemployment. So when you see unemployment numbers quadruple basically in the space of a week, that will have an impact on mortgage rates. So while the market might be normalizing and the Fed might be buying mortgage backed securities and we might see China and sovereign nations come in and buy US debt again over the next week or so. So the unemployment figures due to COVID 19 might have an opposite effect on rates as well. So it's still a very uncertain time, still very unprecedented times and you know, best thing to do would be to call us and have us monitor the rates if you're looking to refinance or get a sense of where the market is and maybe schedule another call for two weeks from now to see where the market is then and maybe take advantage of a more normal market.

So if we get to say July or August and the fears of coronavirus have tapered off potentially, but we're in a recession or at least I guess at that point we couldn't technically be in a recession since we wouldn't have 2/4 of downgrowth. But we would all know that we're in a recession, what would you expect rates to get down to?

So I think the market will react more normal or begin to react normally Once we see COVID 19 numbers taper off or start to head south rather than going north. Right now everything's on the upside. There's more and more cases every day. There's more and more deaths every day, creating more and more uncertainty and more and more panic. States across the country are locking down movement of people, of companies, of industries to a degree are shuttering doors and laying people off. So right now, until those numbers start to go down, until they start to see or the market has a different sense of containment and those numbers start to improve, that's when I think even though we might still be in a recession, that we'll see mortgage rates start to react more normally and come down in relation to the recessionary nature of the economy. Well, I think by July and August, should this, you know, the fear of growth, of the pandemic be tapering off and be more contained, so to speak, and health systems are able to treat folks with the disease, then I think you'll see mortgage rates come down to a more natural level and be reflective of the recessionary nature of the market. So hopefully by then that's what happens. But until we see those numbers start to decline, I don't think the market will really have a lot of confidence. And the Fed may be the only buyer of mortgage backed securities until that happens.

We mentioned the unemployment numbers and the skyrocketing numbers. If that comes in, say we have 2.2 million in this one, but then we see a decrease to maybe I think it's going to be higher than the 600,000. But if we drop down to 1 million even, how much of an impact do you think that would have?

I think it has a huge impact because it takes less. The perception of risk of default in the mortgages comes out a little bit further, comes out a little bit more from the lender's point of view and from the risk point of view because bad people are back to work. Right? So that risk of default should normalize. I mean your typical default is rate any given natural year is probably between 2 and a half and 3% or less. So when unemployment numbers spike like that in a week, there's a bigger perception of default risk. So that gets priced into rates just across the board. So unemployment numbers come down and the COVID 19 numbers start to come down. I think you'll see a more natural mortgage rate as it relates to like I said the recessionary nature of the market.

So what you're saying is what the investors should be looking at as the Fed and other entities make moves is if you want to know what's best for your rate, you want to see either the Fed or other entities buying up mortgage backed securities. And when that starts happening, we're going to see rates dropping a lot. So if the Fed makes a move but they don't include mortgage backed securities is it's not going to really impact us. But if you see them come in making a huge purchase, that's kind of when we should look at the rates potentially dropping significantly.

Well, yeah, I think that's what will improve rates. I mean obviously the more demand we have for the loans that we're locking at the rates we're locking them at brings confidence back to that market. So you know, right now we're just with certain rates and certain coupons that we had out there that were locked. There are no buyers for that. There's no return on it. So that's why we're seeing mortgage rates get higher. Because you know those buyers that are out there want the return to cover the losses on the other deals, the previous deals. So very vague or it's a general sense of what's going on. But I just wanted to explain, these are the reasons why rates will move high very quickly and they come down a lot slower than they go up. So as we see, as you said, if we see things taper off, if we see numbers as it relates to the unemployment or COVID 19 goes out, then the market should improve. But it will be gradual. It won't be that sharp drop in rate that we saw when the stock market sold off eight days in a row.

So how much? If we continue to see unemployment go up, like you said, the 2.2 million, say it even stays around that or goes up to 2.5 or something, what rates would you see us moving up to? Are we going to move up into the sixes? Are we going to move into the sevens? Even kind of. What rates would you, I mean it's.

Yet to be determined really. I think that's an unknown. You know, there are some folks out there that I spoke to in the industry over the weekend that were predicting, you know, rates to go up, the primary home rates to go north of five and a half, six percent. But I don't know, it's impossible to tell because you can still see, you can still see unemployment spike, but you can see bigger mortgage backed security market markets purchasing mortgages so it might offset each other. The recession in nature of the market may offset some of that as well. It's really impossible to predict where rates would go either up or down at this point. But again, the reason for the call today was just to kind of explain why we're seeing such volatility in the market.

All right, well, is there anything else investors need to know or have we covered it all?

Again, I would say if you are under contract, don't hesitate to proceed to move forward with your contract. We do believe the market will improve from a rate perspective. We can get all of your loans approved and qualified. And one thing that we are getting questions on I suppose is how we're closing loans because of COVID 19 our appraisers going out is notaries coming and signing documents for folks. So we're working on obviously Fannie and Freddie are developing contingency plans I suppose to allow loans to close mortgages. Mortgage companies like us are deemed essential businesses. So we are still operating. So they've made some concessions. We're generally doing drive by appraisals now. We're working on E signatures, e notaries so that folks can sign their documents electronically, maybe scanning their IDs and you know, taking videos of them signing, which are done notarized electronically. So there's things like that coming to allow us to continue to close loans. But for the folks that are under contract and kind of on the fence, I would float the rate for you. I would get everything approved. I would anticipate the mortgage rates to improve and once they do, we lock in the rate for you. So the good thing as well is with us, if you do lock a rate and the market continues to improve, we will renegotiate and float that rate down for free. That is some added protection there. If you did lock in the current market rate today, but we're not closing for a month, the market could very well improve and we could float you down. So we anticipate that occurring also. But they are making some concessions as it relates to appraisals, as it relates to notaries, as it relates to the fear that folks have of being exposed or exposing someone else.

Well, I appreciate your time. Thank you very much.

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