Bloomberg Businessweek March 30, 2020 pp29 “A Suddenly Fragile Mortgage Market” “Wall Street is rattled by concerns about debt payment and a shortage of funds”. “The Fed is going to do whatever it takes to restore normal functioning in the market”.
The $16T American mortgage market is under duress from the economic shutdown caused by COVID-19 restrictions. The fallout is “threatening to make good loans go bad and causing funding for some new loans to dry up”. Companies and citizens holding leases or mortgages may not be able to pay on time or at all. Industry professionals “warn of a cascade of defaults”. Meanwhile as mortgages are bundled and traded as mortgage-backed securities investors are asking for redemptions from funds and “counterparties who’ve lent them [investors] money” are making margin calls. Investment companies are forced to “solicit offers on billions of dollars in assets in emergency sales…”. These companies may be unable to honor margin calls and that may damage the value of underlying bonds. Institutional investors are backing off on purchases.
The Fed is “buying unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs low. It also is [ensuring] more credit flows to businesses…local and state governments”. It is noted the Fed is focusing on mortgages they help create. Consequently, some banks funding mortgage lenders are tightening requirements and raising prices or continuing efforts only on government-back loans. Such government-backed loans represent only half of all mortgages.
Credit worthiness is declining as businesses are “drawing down credit lines” further worrying lenders about potential defaults.
“It all means households are being charged mortgage rates far above, where they ought to be…”