Covid 19 – Residential Real Estate; The Impact Of Covid-19 On Residential Mortage Rates, The Residential Mortgage Market, And The Residential Real Estate Market Generally

The COVID-19 pandemic has broadly impacted the residential real estate industry in both the context of overall market conditions and in the context of the structure and logistics of individual transactions.

In February and March of 2020, many state and local governments initially responded to the pandemic by instituting shutdowns that severely limited economic activity and government services. The shutdowns and government closures also resulted in logistical challenges and delayed real estate transactions. The result was a severe economic contraction which was one factor in May and April home sales dropping to the lowest levels since the beginning of the 2008 housing and financial crisis.

The Federal Reserve Bank responded to the anticipated economic contraction in March of 2020 with two emergency interest rate cuts and active purchasing of mortgage-backed securities. In addition, state governments took actions to expanded access to remote/virtual services, such as allowing or expanding the electronic recording of real estate transactions documents and allowing some procedural and regulatory flexibility by enacting or expanding laws and regulations to enable remote notarizations of documents.

During the initial phase of the pandemic, logistical challenges made contractual deadlines impossible to meet. Flexibility was necessary to keep transactions from falling apart and parties were left to rely on the good faith of one another since many contracts lacked provisions that effectively dealt with the unanticipated logistical challenges presented by the pandemic. Fortunately, human nature is such that people are often more flexible and accommodating during a crisis this magnitude because everyone is impacted by the crisis. As a crisis progresses, however, people become more accustomed to the new normal and less flexible.

The regulatory and logistical adjustments by state governments have enabled the real estate industry to return to full operation with relative speed and the actions of the Federal Reserve Bank has pushed residential mortgage interest rates to the lowest rates in at least 100 years. The historically low interest rates have helped to stabilize the residential purchase market (home sales and home prices increased substantially during the summer and fall) and even caused a boom in residential mortgage refinancing (according to data, more than 4 million residential mortgages, totaling loans of more than $2 trillion, were refinanced during 2020 and experts expect the number of mortgage refinances to increase dramatically during 2021).

The current condition of the residential real estate market presents opportunities for both buyers and sellers which are likely to persist during 2021, but lingering economic uncertainty, the continuing uncertainty of the pandemic, and recent political instability present a host of risks that could imperil those opportunities. The government’s responses have been tremendously helpful in mitigating some hurdles presented by the pandemic and the low interest rates have provided more market stability, but there is significant potential for more volatility and potential disruptions that may adversely impact residential transactions.

Mitigating risks related to the current uncertainty requires inclusion of specially drafted provisions in transactional documents. For example, parties should contractually agree to accept remote notarizations. Parties should agree to automatic extensions of deadlines that could be impacted by shutdowns or closures of government offices. Buyers seeking financing should seek provisions that would protect the buyer from sudden shifts in interest rates or even closures of financial institutions that might render a transaction impossible. Additionally, buyers seeking financing need to pay particular attention to the terms of Loan Commitments, which may contain broad exemptions excusing the lender from performing in the event of extraordinary circumstances that may arise due to the pandemic. Buyers will find themselves in a difficult circumstance if they fail to incorporate their lender’s exemptions as conditions to their duty to perform under a purchase agreement.

In our work with buyers, sellers, investors, and financial institutions we are constantly analyzing potential risks presented by a challenging and continually shifting financial, regulatory, and economic environment and structuring transactions to mitigate those risks. Please consult with a Darrow and Everett attorney to help you navigate and properly structure your real estate transactions both during the pandemic and afterwards.

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This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.