In 2008, home prices were driven down with the excess supply and providing the less creditworthy buyers mortgage more than their financial capability to refinance their higher interest rate mortgage. As the lesson learned, stringent policies in lending standards, newly instituted mortgage forbearance programs, and moratoria on foreclosure has led to set up a better repayment model than it was at the time of 2008. Unlike in 2008’s financial crisis, which has halted the industry completely has led Federal Reserve to take action to restore faith in the industry by lenders and ensuring that with these steps lending can continue even after another recession.
As we are heading towards another recession, the US 10-year Treasury bond yields will go down and prices of a bond will go up. To deal with the current scenario and maintaining sufficient liquidity in the marked Federal Reserve has begun the process of purchasing treasuries and Mortgage-Backed Securities (MBS) to stabilize the interest rates in the mortgage market.
According to Black Knight a mortgage industry data analytics company, delinquencies rose 3.4% in March, and 6.4% of all mortgages are currently in forbearance agreements.
In addition to actions taken by the Fed, Government-sponsored entities like Fannie Mae and Freddie Mac have decided to make servicing rights easier to transfer rather than offer a full bailout. They also offered to buy loans in forbearance, suspending all the foreclosure or conviction of buyers for 90 days. However, purchasing the loan can be costly for the lenders.
As a result, mortgage originators will still have an appetite to lend but rates might be higher than expected. Federal Reserve and Treasury have also dropped a hint that the US mortgage market is healthy enough for now.
by Niyati Bhagat