Coronavirus Could Trigger Mortgage Market Crash as First FDIC-Insured Bank Falls

April 5, 2020 11:00 PM UTC
The potential closure of more regional banks in the near-term poses an unexpected threat to mortgage holders in the near-term.
  • Mortgage holders could be in trouble as the first FDIC-insured bank falls in West Virginia.
  • High-risk mortgage notes are vulnerable to being called, which would make mortgages due in full immediately.
  • Mortgage holders are under pressure as the coronavirus pandemic sweeps America.

West Virginia’s First State Bank became the first bank to fall after the coronavirus pandemic rapidly swept across the United States. The potential closure of more regional banks in the near-term poses an unexpected threat to mortgage holders in the near-term.

Mortgage note calls may happen, which may leave many bankrupt

When a bank’s assets get transferred to another institution following a bankruptcy or forced closure by state regulators, mortgages are turned over to another bank or investor.

In such cases, the new lender can “call in” mortgage notes they find to be risky, making mortgage payments due immediately.

When a mortgage note gets called in, a process that is also described as mortgage acceleration, it makes the loan due in full immediately. It forces the borrower to pay the full amount of the mortgage in a notice of days, typically leading to financial wreckage.

Several high-profile investors including Dave Ramsey, best-selling author of “The Total Money Makeover.” detailed their experiences with mortgage note calls in the past.

Ramsey said:

September 22nd, 1988, I remember that the banks got sold. The main bank that we’re dealing with, we had $1.2 million with them and 90-day notes because we’re buying property and flipping it. And that bank got sold to another bank, and the guys in another state looked down and said… let’s limit the relationship, which is banker talk for call his notes to screw his life and they called our notes, giving 90 days to come up with $1.2 million. It started a crash I couldn’t start.

A similar process could occur to mortgage holders in the upcoming months if new lenders perceive them to be high risk. This would force borrowers to come up with a significant amount of money in a very short period of time.

Declining mortgage interest rates led more individuals to purchase homes. | Source: The Street

Will large-scale bank failures happen?

So far, with the Federal Reserve’s efforts to maintain liquidity in the markets, large-scale bank failures as seen in 2008 are not expected to happen.

In the short-term, at least, the closure of small banks is unlikely to affect the common individual purchasing a home with a long-term fixed rate mortgage.

Real estate investors who deal with large sums of capital and high-risk mortgage notes could face similar problems as Ramsey in the 1980s, especially if the coronavirus pandemic applies additional pressure on the financial sector.

The number of confirmed coronavirus cases have surpassed 1.2 million, and President Donald Trump has warned of the toughest weeks to come in April.

Jerome Adams, the U.S. surgeon general, also said “the hardest and the saddest week of most Americans’ lives” is expected, as both the U.S. and Europe struggle to see a flattening of the curve.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Last modified: June 13, 2020 9:40 PM UTC

@iamjosephyoung

Financial analyst based in Seoul, South Korea. Contributing regularly to CCN and Forbes. I have covered the stock market and bitcoin since 2013. Joseph Young is a Trusted Journalist. Visit his MuckRack profile here. Reach him on Twitter or LinkedIn.