The collapse of Silicon Valley Bank and Signature Bank has created volatility in mortgage markets, and according to Jennifer Hughes in the Financial Times, that volatility isn’t expected to settle down overnight. She writes:
The market volatility triggered by the failure of three banks in the past week has spooked traders in economically vital US mortgage-backed securities, leaving other lenders, usually important buyers, on the sidelines.
The $11tn market for bundles of US home loans was already feeling the strain of last year’s soaring interest rates, which pushed up MBS spreads — the additional yield over risk-free US Treasuries that investors demand to hold mortgage debt — even faster.
These spreads have increased from 1.1 percentage points to 1.6 points in the past year.
That in turn forced up mortgage rates and helped lower new home purchase applications in February to their lowest level in more than 20 years. Housing — including investment, rents and other services — accounts for roughly a sixth of the US economy.
Big swings in stock as well as bond markets this week followed the news on Sunday of regulators’ takeover of New York-based Signature Bank. Four days earlier, crypto-focused Silvergate had voluntarily put itself into liquidation.
On Monday, the combination of plunging bank stocks and a dash for the safety of government bonds led Fannie Mae, a Washington-backed home loan body and important source of so-called agency, or government-sponsored, MBS, to postpone its own sale of about $500mn in bonds.
Fannie Mae’s pause followed the pivotal event for the mortgage market, namely the collapse on Friday of Silicon Valley Bank. This came after a botched capital raise following its $1.8bn loss on the sale of a $21bn asset portfolio that included top-rated MBS — a deal that shone a spotlight on the fragile state of the mortgage world.
Banks hold government-backed MBS alongside Treasuries as assets that can be sold easily when cash is needed. The low-yield environment that existed until last year lured them to invest more in mortgage-backed securities because they offered slightly better returns than straight government bonds but were still considered safe.
The hit taken by SVB on its sale has sparked fears that other lenders coping with sudden outflows could be forced to dump their MBS on the market and suffer even greater losses, potentially swamping an already-weak ecosystem.
On Sunday evening, the Federal Reserve announced a new facility to lend to banks against their liquid assets, including MBS. Although the loans will be made at the par, or face, value of the assets, not the lower prices to be found in the markets, the scheme was not expected to stabilise the market overnight.
Read more here.