◼ FINANCE Bloomberg Businessweek March 30, 202029A Suddenly
Mortgage Market
The $16 trillion U.S. mortgage market—epicenter
of the last global financial crisis—is suddenly expe-
riencing its worst turmoil in more than a decade.
Unlike last time, risky mortgages aren’t the cause.
Instead, the pandemic is threatening to make good
loans go bad and causing funding for some new
loans to dry up.
Measures to slow the spread of the disease
have slammed the brakes on commerce, poten-
tially preventing companies from making pay-
ments on their leases and commercial mortgages.
Companies are also firing employees, who won’t
be able to keep up on their own rents and home
loans. Mortgage industry veterans warn of a cas-
cade of defaults.
At the same time, holders of mortgage-backed
securities are fielding redemption requests from
clients, margin calls from jittery counterparties
who’ve lent them money, and drops in their valu-
ations, forcing the funds to solicit offers on billions
of dollars in assets in emergency sales over the
weekend of March 21. The pain continued on the
following Tuesday when Invesco Mortgage Capital
Inc., a real estate investment trust that invests in
mortgage-backed securities, said it’s no longer
able to fund margin calls. If forced sales acceler-
ate, bond prices could fall and put pressure on
other investors.
The tensions are flaring across the property
market—inflating rates for home loans, lead-
ing listing companies such as Zillow Group Inc.
to suspend instant-offer buying programs, and
prompting industry players from real estate bro-
kers to mall owners to plead directly to President
Trump for relief. The Federal Reserve, in a sur-
prise announcement on March 23, said it’s buying
unlimited amounts of Treasury bonds and mort-
gage securities to keep borrowing costs low. It also
set up programs to ensure more credit flows to
businesses of all sizes and state and local govern-
ments. But that effort has limits. For example, the
central bank is focusing on securities consisting
of so-called agency home loans and commercial
mortgages that were created with help from the
federal government. That may account for about
half of the overall mortgage market.
Flagstar Bancorp, one of the biggest U.S. lend-
ers to mortgage providers, said on March 20 that
it stopped funding most new home loans without
government backing. Other so-called warehouse
lenders are tightening financing terms to mortgage
providers, either raising costs or refusing to sup-
port certain types of home loans. One prominent
mortgage funder, Angel Oak Mortgage Solutions,
on March 23 said it’s pausing all loan activity for
two weeks. It blamed an “inability to appropri-
ately evaluate credit risk.”
Banks are facing pressures that will make it
hard for them to step in by making or purchasing
mortgages others are dumping. Corporate borrow-
ers have been drawing down credit lines at banks,
siphoning off cash and raising the prospect that
the lenders will eventually incur losses.
It all means households are being charged
mortgage rates far above where they ought to
be, with no end in sight, says Jeremy Sopko,
co-founder and chief executive officer of Nations
Lending Corp. Interest rates on 30-year fixed-rate
mortgages typically follow yields on the 10-year
Treasury note, a benchmark for borrowing
costs in the U.S. economy. But in March the gap
between the two is set to reach a record, accord-
ing to monthly data going back to 1998.
“The Fed is going to do whatever it takes to
restore normal functioning in the market,” says
Karen Dynan, a Harvard economics professor
who formerly worked as a Fed economist and at
the Department of the Treasury. “But we need
to remember that the root of the problem is that
financial institutions and investors are desperately
seeking cash, so in that sense the Fed’s announce-
ment is not everything that needs to be done.”
�ShahienNasiripour● Wall Street is rattled by concerns about debt payments and a shortage of funds
THE BOTTOM LINE Funds that hold many mortgage bonds are
racing to sell as they face margin calls and clients try to take out
money. It’s amplifying anxiety throughout the system.Fra
gile“The Fed is
going to do
whatever
it takes to
restore normal
functioning in
the market”