The Federal Reserve Bank Takes Aggressive Safeguard Measures for Homeowners and Real Estate Market
The fight against the spread of COVID-19 marches on and we are still in the early days of figuring out our new (temporary) norms and routines and finding new ways to keep our sanity. The craziest thing is that however alone and isolated we are feeling, we are all in this together. And this is not forever. We will feel human again, we will see our friends and family again, we will socialize and have parties and go to restaurants and coffee shops again. We will persevere and we will bounce back. In the meantime though the Fed and the government are taking drastic measures to protect us from a major fallout as best they can.
Federal Reserve Chairman Jerome Powell, left, speaks during the 2019 Stanford Institute for Economic Policy Research Economic Summit. Getty Images
The Federal Reserve Bank is doing what it can to help us come out on top once we’re past the shelter-in-place orders and halt on economic activity. One of the biggest struggles that has been anticipated due to the COVID-19 caused economic downturn, to keep the money flowing, is becoming a reality. The Fed is responding to the threat with all measures that it can. Where as 2008 global financial crisis was intertwined with and ultimately caused by the housing market, we are facing a different economic beast. Supply shortages and disruptions are occurring due to factories closing and limited shipping. The travel industry is suffering massive losses. Events have largely been called off in the name of social distancing. Restaurants, shops, and small businesses are suffering from shutting their doors or being limited to takeout. Many businesses and households will be facing bankruptcy in the coming months because they are unable to pay their bills on time. And we are suffering silently together as we hunker down and wait for the storm to pass. We all can do our parts by helping the small businesses we frequent survive this trying time by continuing to support them. And the Fed is doing what they can to support Main St as well. Fortunately Trump has signed the $2 trillion stimulus bill which will aid many Americans and big and small businesses across the board, including independent contractors (who are usually exempt from things like FMLA or unemployment.
The Federal Reserve Bank Makes Moves to Protect Main St America
The Fed announced on Monday, March 23, that they would be buying unlimited treasury bonds and mortgage-backed securities. Normally when investors start pulling their money from stocks they move them into bonds, which are normally considered investor safe-havens and is essentially buying up debt. However that is not happening right now. Cash is being pulled from the market and just as businesses and households are starting to need to borrow as their cash on hand is drying up. By buying treasury bonds and mortgage-backed securities the Fed is encouraging movement in the credit markets. This is already is more than what the Fed did post-2008 when they simply infused money into the markets over several years. It is anticipated that the Fed will continue to do more in the coming months in effect paling what actions they took post-2008. The recent Fed rate slashes are helping to ensure that money can be borrowed cheaply. The government is essentially shoring up the risks associated with mortgage-backed securities being traded by purchasing them and reducing others “betting” on defaults. It opens up lending b/c it frees up cash for banks. And it limits the risk of financial crisis if there are defaults.
The Fed is also buying certain corporate bonds, which it has never done before. They will additionally announce a “Main Street Business Lending Program to ensure ample availability of loans for large and small business. Some municipalities saw their interest rates jump up to 10% just a week after they had dropped down to under 1% after the Fed rate cuts because bonds were not being bought. This is the perfect example of why the Fed is increasing their bond spending, to keep the rates low and keep money flowing. It is possible they will go the direction of buying municipal bonds as well.
What the Fed is capable of leveraging cannot alleviate the causes of the recession, though what they are doing will help us recovery more quickly. There certainly will be huge losses in Q2 and hopefully when our economy can get rolling again what the Fed has done to protect Main St against major fallouts will enable us to bounce back.
The Fed’s Actions Protect Homeowners and the Real Estate Market
To really understand how the Fed’s actions are providing protection for homeowners and the real estate market we have to understand 2008. In the early to mid 2000’s real estate was booming. Due to Fair-Value Accounting, which requires that assets be valued at market value, the value of mortgage-backed securities also boomed and demand for the derivatives grew. This in term increased the demand for banks to issue new loans. ending standards were lowered to attract more mortgages and consequentially resulted in a lot of sub-prime loans; a lot of which were Adjustable Rate or Interest Only Mortgages. When the real estate market started going, the value of the mortgage-backed securities also went down. When interest rates went up subprime borrowers no-longer could afford to make their payments and defaulted on their loans. We all know what happened after that. The Fed purchasing mortgage-backed securities accomplishes two things; first, it frees up money for the banks to issue new loans and keep money flowing, and second, it takes on the risk of the value of those securities dropping which provides more stability to the mortgage market. This in and of itself is a huge difference between what is happening now versus what happened in 2008 and one of the main factors that helps to keep overall stability in the housing market.
The market is volatile and interest rates remain extremely attractive. If you were considering buying prior to the Coronavirus-fueled economic downturn, you have gained either the ability to move up in purchase price or see some monthly savings just based on interest rate changes. Conditions are changing daily so if you do decide to move forward and there is an opportunity to lock in a good rate, do it because things are literally changing day-to-day.