[COVID-19] Fed Massively Purchasing Mortgage Backed Securities and Driving Down Interest Rates

April 7, 2020 by Nema Daghbandan, Esq.

In the great recession, the Fed purchased significant amounts of mortgage backed debt in a process known as quantitative easing (QE).

QE is thought to be one of the leading reasons for the success of the real estate market coming out of the last recession. In 2009 and 2010 the Fed purchased more than one trillion in mortgage backed securities (MBS). The governmental purchase of MBS is largely credited for driving mortgage rates below 5%, which was unheard of at the time.

Mortgage Real Estate Investment Trusts (REITs) were especially hard hit over the last few weeks due to the potentially elevated rate of delinquencies in mortgage payments. This is a direct result of the turbulent U.S. economy weathering the fallout of a global pandemic. Market analysts were fearful that the Fed would divert the majority of its focus on thawing the market by purchasing U.S. Treasuries primarily, versus the purchase of MBS. In the private lending industry, REITs such as Redwood Trust and MFA were significant purchasers of private lending companies and the loans they were generating, particularly fully amortized rental loans.

The Fed’s Effort to Drive Down Rates

Last week, in an unprecedented move, the Fed purchased $183 billion in MBS, signaling a willingness to proactively drive down mortgage lending rates yet again, this time bringing rates to at or around 3%.

The overall performance spread between the 10-year U.S. Treasury note and indexes that monitor CMBS have been consistently narrowing over the course of the past week. This potentially indicates that the Fed’s current measures have stemmed the initial nosedive of mortgage REITs, which are entities that provided loans or that purchase commercial or residential MBS as investment options.

The Fed introduced an unprecedented range of initiatives to buttress a volatile economy dealing with severe commercial restrictions following its first emergency measures implemented on March 3, as well as similar efforts that failed to dissolve public outcry that insufficient effort was being taken. By the next day, the Fed’s dramatic actions had sparked a bounceback in the U.S. equity market, which experienced the largest three-day rebound since the Great Depression for the Dow industrials in the aftermath of the passage of the $2 trillion stimulus bill by Congress.

An Evolving REIT Marketplace

While the mortgage REIT market did a 180 thanks to the Fed initiatives, there is a lot of fear and uncertainty as tenants are predicted to fail in meeting their rental payments in Q2. Rental revenue will subsequently decrease along with occupancy rates for small-to-mid-sized corporations—although this may not hold true for major enterprise tenants.

It is still unclear as to the amount of debt that will be refinanced or payments that will be delayed. The market has gone through forced selling after forced selling, which resulted in markets being unpredictable and prompting entities holding formidable assets to sell prematurely. This foreshadows an evolving marketplace that deals with future mortgage REITs differently in regards to leverage and financing.

Many organizations are still pushing for the Fed to purchase private MBS in addition to Agency debt. Regardless, the Fed’s purchases have already started to drive down rates, and will hopefully keep the real estate market afloat during this time of uncertainty.

About the Author

Mr. Daghbandan’s practice entails all facets of lending matters across the country including but not limited to the preparation of loan documents and addenda in all fifty states, loss mitigation efforts, preparation and negotiation of secondary market documents including loan sales and participation agreements, line of credit/warehouse facilities, hypothecations and securitizations.  Mr. Daghbandan advises financial institutions on various lending matters including licensing, usury, and foreclosure. Mr. Daghbandan is also an expert in default management and leads the firm’s nonjudicial trustee group.

Have questions about COVID-19’s impacts in lending? Reach out to Nema here or visit our Impacts in Lending page here.

Connect with us