News

Fed purchase of mortgage-backed securities causes concern for brokers

photo provided by iStock

March 31, 2020

As financial institutions, credit unions and ATM operators try to determine how the coronavirus will affect their businesses in the future, the Federal Reserve attempted to help the financial industry by purchasing $183 billion in mortgage-backed securities to drive the rates down. The good news is that rates went down; the bad news is that the massive purchase created a colossal problem with the hedge mortgage that bankers use to protect themselves from rate increases, as reported by CNBC.

If the rate in the market is higher than the mortgage rate that the bank locks in for its customers, the hedge helps protect the lender against higher rates until the mortgage closes. Unfortunately, with the instability of the market, customers couldn’t close on their loans because of quarantines, and mortgage lenders were left with no off-setting loans and only the cost of the hedge.

This instability caused substantial margin calls from broker-dealers to the mortgage bankers and the bankers are now faced with hundreds, thousands and in some cases millions of dollars in margin calls that could put them out of business. The ones hardest hit by these purchases are independent mortgage brokers who wrote 55% of the $2.1 trillion mortgages created last year. 

The Fed came into the mortgage market as rates started rising two weeks ago. A large group of investors began selling mortgage securities to raise cash and offset losses experienced by the stock market fluctuations. The Fed bought $68 billion of mortgages, but that didn’t curtail the massive selling, which prompted the Fed to purchase an additional $183 billion of mortgage-backed securities.

The Mortgage Brokers Association initially enlisted the help of the Fed but as margin calls created havoc, it sent letters to the Fed, to regulators, the Financial Industry Regulatory Authority and the Securities and Exchange Commission asking for relief for broker-dealers, who provide the hedge, and help stopping lenders from escalating margin calls that will ultimately cause more damage in the industry.

The letters stated, "The dramatic price volatility in the market for agency mortgage-backed securities [MBS] over the past week is leading to broker-dealer margin calls on mortgage lenders’ hedge positions that are unsustainable for many such lenders. 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."