- 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.
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.
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 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.
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.
Last modified: September 23, 2020 1:47 PM