The silver lining of the coronavirus crisis is that a measure of unity that has been restored to the American political landscape.
Regardless of how many people have actually been afflicted by COVID-19, everyone’s life has been brought to a screeching, grinding halt and the entire global economy has been sent into a tailspin.
Now a bipartisan group of senators have joined together to try to prevent this contaminating the U.S. housing market.
The $2 trillion CARES (Coronavirus Aid, Relief, and. Economic Security) Act has flushed the markets with cash, which is vital for people who’ve lost their jobs, but there’s the possibility that a new housing crisis may occur.
Regardless of the stimulus, both renters and buyers fear that they won’t be able to afford their housing budget. The Federal House Finance Agency (FHFA) announced last month it had instructed Fannie Mae and Freddie Mac to suspend foreclosure actions and evictions for at least 60 days due to coronavirus, which will help – but that still leaves Ginnie Mae.
Designed to help make low-income housing affordable, Ginnie Mae accounts for $2 trillion in single-family mortgages across about 12 million borrowers.
Ginnie Mae has stepped in with a guarantee to have a plan to offer liquidity in the next two weeks, but there needs to be more action than just offering liquidity — borrowers who have not been affected by the COVID-19 pandemic shouldn’t get to treat this forbearance as a free pass on paying their mortgages for a year.
Ginne Mae needs to clear guard rails about the terms of the repayment after forbearance to ensure borrowers, servicers, and the government can plan for the economic realities of the upcoming year.
Mentioned earlier, a bipartisan coalition — led by Sen. Mark Warner, D-Va., — is urging such immediate action to curtail an impending housing crisis in the finance system due to the current economic fallout.
"Since this liquidity need was created by the CARES Act’s entirely appropriate, but extraordinary, requirement to provide widespread forbearance, measures should be taken to ensure that the businesses required to execute on that commitment can survive to see it through," Warner and the other senators wrote in a letter to the Treasury Department.
As part of the market reaction to COVID-19, the CARES ACT has begun to spur servicers to deal with aggressive margin calls from banks. Recent intervention by the Federal Reserve has triggered a wave of margin calls by broker-dealers who sold hedges to mortgage bankers.
When the investor's equity falls below a certain percentage requirement – the maintenance margin — it triggers a margin call. Those who’ve been foolish enough to look at their portfolio this week know that, alas, their investments’ value has doubtless dropped by a lot of percentages.
Most precisely, the main issue at stake now is the $183 billion in mortgage-backed securities purchased by the Federal Reserve last week as part of quantitative easing lifeline.
Now, when mortgage bankers secure loans, they frequently sell them on the secondary market to as part of mortgage-backed securities – yes those awful financial instruments from "The Big Short."
But in a lot of cases, bankers might hold the loan for awhile and hedge – or short – the mortgage to protect against rate increases that would depreciate the value of the mortgage or to make a quick buck.
Now, the broker-dealers that sold these hedges are drowning mortgage bankers in margin calls, with the Mortgage Bankers Association describing the volume as "staggering and unprecedented."
Congress gave us the stimulus, but the Federal Reserve and Securities and Exchange Commission must demand banks stop margin calls on non-bank servicers that handle the payment processing.
Servicers who were financially stable prior to this crisis only have a (we hope) temporary liquidity issue, not a long-term solvency issue. However, if margin calls from banks are not ceased, then this will indeed become a solvency issue.
The ineptitude of the Chinese Communist Party has indisputably infected the entire world.
The long-term implications mean that we are all going to have to realign the huge chunks of our economy we shipped over the Pacific, but in the short term, we have to address the current liquidity crisis.
The Fed and SEC have to intervene on margin calls — or else we’re never going to get off of life support.
Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House, and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. To read more of his reports — Click Here Now.
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