Updated: Sep 22, 2022
September 22, 2022 | Premium Service | A couple of years ago in The Institutional Risk Analyst, we predicted the impending collapse of the mortgage industry due to COVID. In “The Bear Case for Mortgage Lenders,” we described how the true risk to mortgage lenders is not insufficient capital but the cost of default servicing, when consumers cannot pay and the servicer is required to advance principal and interest payments to bond holders. But then the Fed rode to the rescue.
By May of 2020, the banking industry had put almost $70 billion aside for credit losses and mortgage lenders were preparing for Armageddon as millions of Americans were given loan forbearance. By the end of the year, however, even as COVID lockdowns started to seriously damage the global economy, the problem went away. By June 2020, the mortgage industry was in the midst of a boom caused by a 300bp decrease in lending rates thanks to the FOMC. The Fed's quantitative easing or QE made the problem of financing loan delinquency go away -- until now.