BREAKING NEWS: The Fed To Stabilize Mortgage Market Due To Coronavirus Pandemic
Most mortgage lenders are going through a tough time due to the coronavirus pandemic crisis.
- The coronavirus pandemic has caused a shut down in the US economy
- The Dow Jones Industrial Average has tanked over 20% in a matter of a few weeks, sending the equity markets in bear market territory
- Never in history has the stock markets been so volatile
- Many governors have issued a stay at home order
- Restaurants and bars are closed during the coronavirus crisis
- Economists expect many restaurants and bars will be out of business due to the economic crisis in the US. Unemployment claims reached an all-time high of over 3,000,000 last week
- The strong housing and mortgage markets have been devastated by the economic downturn due to the pandemic
- Many mortgage lenders are facing bankruptcy and/or going out of business due to illiquidity on the secondary market
- The $2 trillion coronavirus stimulus bill was passed into law by President Trump
- Included in the bill was a law that allows a mortgage forbearance for unemployed homeowners
- Unemployment rates may top 30% in the coming weeks and months according to many experts
- A forbearance is when the borrower is given a reprieve over a period of months where they do not have to pay their mortgage payments
- However, lenders still have to pay principal and interest to the investors
- They also need to pay property taxes and homeowners insurance for borrowers who have an escrow
- Many economists predict a housing market crash worse than the 2008 financial crisis
In this breaking news article, we will discuss and cover the Fed To Stabilize Mortgage Market Due To Coronavirus Pandemic Crisis.
Fed To Stabilize Mortgage Market During The Coronavirus Economic Crisis
Never in the history in the US as well as globally has there been an economic shut down like we are having now due to the coronavirus pandemic crisis. It is like the economy has shut down overnight. Many cities in the US are like a ghost town. Businesses are closed, people are couped up in their homes, and the government is issuing stay at home and social distancing orders. Non-essential businesses are ordered closed. Unfortunately, nobody knows how long this crisis will last.
Michael Gracz of Gustan Cho Associates has been following the economic and housing impact of the coronavirus pandemic crisis. Mike Gracz said the following:
This particular crisis seems more than a minor bump in the grand scheme of things, especially because there is little precedent of something like this. Unlike the economic crisis of the past few decades, which were borne out of greed and irrationality, this one’s a result of something that wasn’t really something we as humans were in control of altogether. But given how resilient mankind has been in all its history, there is enough reason to believe that we’ll come out of this fine. In other words, there is reason to stay optimistic. Not for the faint-of-the-heart, we would say. With many businesses having come to a stand-still all of a sudden, there is wide-spread panic. People are selling everything because the value of stocks and bonds on any given day is based on their promise of being able to generate cash-flows in the future. But all of a sudden, that future isn’t very certain and there is little clarity on what’s going to happen, at least in the short-term. That is leading to heavy losses in those markets. Not even assets such as gold and government bonds, which people flock to in times of a crisis, are being spared. ‘Red’ is all you see when you go to any finance website.
Government Bonds Losing Value Like Never Before
The government has money and is able to pay back its bond obligations. Then why are government bonds losing value? Government bonds are losing value due to the fact Congress is passing spending bills to assist Americans and businesses during time of an economic collapse. The federal government borrows money by issuing government bonds which are borrowed money. They use that money to help taxpayers and businesses. The bonds increase the supply of bonds which causes falling bond prices. Phase three of the stimulus bill was $2 trillion dollars.
Role And Function Of The Federal Reserve Board
The function and role of the Federal Reserve Board are to keep the US economy in order with good employment and economic growth. The Central Bank also keeps inflation in order by adjusting interest rates. By issuing an overabundance of government bonds, there is more supply whereby decreasing its value. When the government is short of money, the Fed is the lender that supplies money. In cases where the government needs money urgently, the Fed steps in and prints money to purchase bonds. With the money from the Fed, the government can use it like funding the $2 trillion stimulus package. The government then uses these funds to use it as loans to businesses and/or grants for taxpayers in times of a crisis like we are in now. The US economy is at a standstill. Unemployment claims are expected to continue. Many economists expect unemployment to reach as high as 30% or more in the coming weeks and months.
Massimo Ressa of Gustan Cho Associates said the following:
With widespread unemployment expected in the next few months, more and more people are expected to not be able to make their monthly mortgage payments. With a higher rate of default expected, at least in the near-term, banks and other investors aren’t willing to lend money to people at the same rates as were before the crisis hit. The risk they take when lending money today has gone up, so they are asking people to pay a higher interest rate in times like these to help them cover their risk. That has led the mortgage rates higher in the last couple of weeks to levels not seen in a few years. The real estate industry comprises over 13% of the US GDP. With such a large fraction of the economy dependent on housing, if rates rise, people will buy less due to in-affordability, leading to substantial job loss in real estate that employs over 1.5 million people – from material manufacturers to suppliers and from construction workers to brokers. To keep those jobs intact, the Fed wants to ensure that mortgage rates remain in control and low enough so people can continue to afford homes and the real estate industry stays afloat. The way the mortgage market works is that once a bank makes a loan to an individual to buy a home, the bank sells off the loan to Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac. The GSEs then package these loans into a large pool of say, a thousand mortgages each, and sell them off as Mortgage-Backed-Securities (MBS) to investors who have large sums of money. The money that homebuyers pay every month ultimately flows to these investors and that’s how the banks can constantly make new loans without running out of money.
During times of financial crisis, the value of mortgage-backed securities (MBS) plummets just like government bonds drop. This is what we are experiencing right now during the coronavirus pandemic crisis. This is hurting mortgage lenders. MBS drops significantly in value due to investors not wanting to take on risk on securities that are higher risk. With this pandemic, mortgage defaults is expected to increase. Therefore, MBS values plummet. With less demand for mortgage-backed securities, the price of MBS will be tanking.
How The Fed To Stabilize Mortgage Market Works?
If the Fed does not step in to help the mortgage markets, it will mean the end of the industry. The Fed needs to stabilize the mortgage market in order for investors to purchase mortgage-backed securities. If the Fed buys mortgage-backed securities, investors will rest assured their investments are safe so they will be more willing to invest. Due to the Fed, investors will consider MBS less risky investments and take a lower rate of return. By doing so, mortgage rates will remain low and more homebuyers will be purchasing homes and homeowners will be refinancing. Fed to stabilize mortgage market by buying MBS. By the Fed doing so, they can support the mortgage and housing industry. Last week the Federal Reserve Board announced they will be buying mortgage-backed securities effective immediately. The Fed will be purchasing billions of dollars worth of mortgage-backed securities in the coming days, weeks, months to stabilize the price of MBS. By keeping mortgage-backed securities back up, it allows lenders to originate and fund mortgage loans.