Many times history repeats, with a twist.
In 2008 the “Residential” Mortgage Backed Securities (MBS) put pressure on the financial system because the credit quality of the mortgages was poor. Subsequently, underwriting guidelines tighten, and the quality of the present loans is excellent.
We all know in recent history that the gov’t closed or slowed the economy to avoid spreading COVID. To compensate for the slow economy the Fed dropped the rates essentially to “0” to stimulate and add liquidity to the economy. The results were mortgage rates and gov’t bonds to < 3%.
Move forward to where the Fed’s actions (leaving rates too low for too long), supply chain problems, and the reopening of the economy creates unacceptably high inflation. The Fed has in 10 months aggressively increased the Fed Funds Rate close to 5%.
Mortgage and bonds having over doubling in rate on their own will slow the economy, and purchases. Where it’s an issue now with the banking system is where the banks under financial or regulatory pressure may have to sell off some of their bond holdings to increase reserves to meet regulations, and may they have to sell the bonds at a substantial “discount”. No investor will buy a seasoned bond at 3% if the present market rate is at 6%. So the asset that may originally have a $500K value, now can have a $450K market value. That’s called “Mark to Market”.
Thus where in the past there was a credit and foreclosure risk to mortgages, this time it’s interest rate risk.
On the upside, the rates have dropped a fair amount recently, which helps affordability. The Downside is lenders will tighten lending standards, and restrict new lending as their liquidity has tightened.
Another risk that you’ll hear about in the future is the Commercial Mortgage Backed Securities (CMBS) invested in Office Space. We know that the COVID shutdown expedited the work-from-home systems, and the need for substantial office space has been scaled back. Lenders that have CMBS in their portfolios can come under pressure. CMBS generally originated with only 5 -7 year terms, not the standard residential 30 years. There can be issues as these mortgages mature and have to be refinanced at market rates.
There are several other elements putting pressure on banks… regionally specific economic issues, paying to depositors high rates while returns on loans made are low, etc. None of these issues should be a surprise, as the Fed’s pendulum swung too far in one direction…
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, SRES, SFR, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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