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Did the Fed Just Accidentally Trigger a Housing Market Crash?


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  • The Federal Reserve just bought $250 billion of mortgage-backed securities in a bid to strengthen the markets.
  • But the move caused a tsunami of margin calls across the mortgage banker industry. Some warned they could go bankrupt within days.
  • Homebuyer demand has dried up and millions of mortgage delinquencies loom.

The Federal Reserve unloaded its bazooka of stimulus all over the markets in the last two weeks. But there’s some major collateral damage. By flooding the markets with money, they may have accidentally trigged a housing market crash.

The Mortgage Bankers Association (MBA) warned of ‘large scale disruption’ to the housing market and accused the Fed of using a ‘sledgehammer.’

This is a collapse of the system.

 

 

How the Federal Reserve almost broke the housing market

Here’s how it works. Mortgage bankers hedge themselves against interest rates going up. If rates go up, the hedge makes sure they don’t lose money from customers who locked in a lower mortgage rate.

It’s a standard practice across the industry and almost never causes any problems.

Until now.

As part of the coronavirus stimulus action, the Fed bought $250 billion worth of mortgage-backed securities in a space of two weeks. For perspective, that dwarfs the amount they bought during the housing crisis by $80 billion.

Now mortgage bankers face bankruptcy

By flooding the market with money, the Fed forced down rates. Problem is, that just blew up the hedge.

Mortgage bankers are now getting margin calls and need to pay tens of millions of dollars to meet them. Even well capitalised lenders are on the brink of going under because of it. In a letter to regulators, the MBA wrote:

Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.

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Housing market on the brink

This isn’t the only seismic shock to the housing market since the start of the coronavirus pandemic. Home buying demand has all but evaporated in the last month. Year-on-year growth in the housing market slumped from 27% in January and February to 1% in March.

Zillow, a company that buys property to resell, has suspended all purchases.

Meanwhile, a record 3.3 million people registered unemployed last week. Even with the government’s promised $1,200 check, many households won’t be able to pay the mortgage. A tsunami of delinquencies is coming.

And just look at this chart which tracks Canadian commercial real estate. The price collapsed over fears of widespread defaults.

The Vanguard FTSE Canadian Capped REIT Index ETF which tracks commercial real estate plunged in March. | Source: TradingView / Ben Rickert

The Airbnb bubble just popped

The housing market is also buckling under the massive unwind of Airbnb rentals. With travel effectively ground to a halt, Airbnb properties are empty. Anecdotal reports suggest this is a bubble waiting to pop.

One reveals:

My neighbor is an Airbnb super host. She is on forums with other hosts. Many of them have 10+ mortgages. 0 guests are booking their properties. They are running out of cash.

Many Airbnb hosts are operating flimsy empires, leveraged up to the eyeballs on cheap mortgages. If the coronavirus pandemic drags on, many thousands will default.

We’re already seeing the effects spill out on the housing market. With no short-term bookings, Airbnb hosts are flooding the regular rental market. London just saw a 45% rise in rentals hit the market. It’s 64% in Dublin and 78% in the British tourist town of Bath.

The housing market is under pressure from almost every angle and the cracks are starting to show. Let’s hope this isn’t 2008 all over again.

This article was edited by Samburaj Das.

@_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.

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House sales have been really slow around here since fall. Couple of my neighbors are trying to sell right now and very few were even looking before this virus came along.

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47 minutes ago, FrankieJames7 said:

it's going to be like a new world order after this is blown over. much of the elites will have their wealth and power scattered to the wind. huge opportunity after this. get ready for it

Um, no. The wealthy and powerful are licking their chops. 

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9 hours ago, f7ben said:

They fucked mortgage originators pretty bad. Of course when I think of lenders getting fucked on a margin call it warms my heart

the people on the street are going to get screwed as well.  We went to market with a batch of loans that are now unsellable,  sure we will take the hit on those but we will just shut off those types of borrowers in the future as have other companies.  I priced a VA borrower yesterday who with one large lender would have to pay 15% to close the loan with them.  most of the lenders were at 4-5% to get a higher rate than they could get with no points back on 3/3.    

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2 minutes ago, Angry ginger said:

the people on the street are going to get screwed as well.  We went to market with a batch of loans that are now unsellable,  sure we will take the hit on those but we will just shut off those types of borrowers in the future as have other companies.  I priced a VA borrower yesterday who with one large lender would have to pay 15% to close the loan with them.  most of the lenders were at 4-5% to get a higher rate than they could get with no points back on 3/3.    

That will lead to a housing crash worse than 2008.....

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2 minutes ago, Angry ginger said:

the people on the street are going to get screwed as well.  We went to market with a batch of loans that are now unsellable,  sure we will take the hit on those but we will just shut off those types of borrowers in the future as have other companies.  I priced a VA borrower yesterday who with one large lender would have to pay 15% to close the loan with them.  most of the lenders were at 4-5% to get a higher rate than they could get with no points back on 3/3.    

Shouldn't you be getting rid of the people who made the loans?

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Just now, racer254 said:

Shouldn't you be getting rid of the people who made the loans?

why,  3 weeks ago there was a healthy market for those loans.  We literally have 800 fico 50% down borrowers whose loans we have trouble with given whats happened in the market.  

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1 minute ago, Angry ginger said:

why,  3 weeks ago there was a healthy market for those loans.  We literally have 800 fico 50% down borrowers whose loans we have trouble with given whats happened in the market.  

How is that the borrowers fault?

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2 minutes ago, spin_dry said:

They all come around eventually. Support your trump myth. It’s important as ever now. 

You got 535 members of congress to thank first.  Now you can really be a baller with that 1200 bucks.  Should be able to buy you a nice e-bike.  LOL

Edited by racer254
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4 minutes ago, racer254 said:

How is that the borrowers fault?

never said any of this was the borrowers fault.  the broken mortgage market isn't just going to fuck over the large lenders that some would be happy to see implode.  it effects people on the streets.   We tightened guidelines in 72 hours to almost worse than we saw during the financial crash,  not because we wanted to but because to survive we can't write loans that investors won't buy.  We have customers who should be seeing a 200/mo payment drop who now won't be able to close because their product disappeared.  

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