Financial stresses in the current market stem from an “extreme global flight-to-safety” and liquidity.
The spread of COVID-19 has caused disruptions in the financial and economic markets. However, the Joint Center for Housing Studies of Harvard University looked at how the stresses facing the market could impact the housing industry. Don Layton, the former CEO of Freddie Mac and the author of the piece, said many real estate investment trusts specialize in mortgage-related assets, ranging from liquidized agency-mortgage backed securities or commercial mortgage-backed securities and other real-estate debt models. Layton said that the financial stresses in the current market stem from an “extreme global flight-to-safety” and liquidity, which is resulting in high demand for cash. “Although agency mortgage-backed securities are government-supported, there is a high spread between the yield on mortgage-backed securities and the equivalent maturity Treasuries,” Layton said. “The agency mortgage-backed security market has long been regarded as second in size and liquidity only to the market for Treasuries themselves, and so agency mortgage-backed securities investors are rattled.” Also, a concern for Layton could be the losses suffered by the GSEs. He said, combined, that Fannie Mae and Freddie Mac have about $5 trillion in credit guarantees, mostly in single-family loans and securities investments. While losing large amounts during the Great Recession, Layton said the GSEs have eliminated the major sources of those losses. “Ideally, their credit reserves should rise—they are, after all, supposed to take appropriate credit risk—but not anything like in the last crisis,” Layton said.
Source: DSNews