New mortgage crisis in America with the spread of Corona

A state of anticipation and anxiety prevails in the banking sector and the mortgage market in the United States, due to the failure of millions of American families to pay off mortgage loans, amid the continued closure of the economy. The burdensome closure of businesses and social restrictions imposed in most states to slow the spread of the epidemic left millions of homeowners with their jobs, and then defaulted on mortgage payments.

Economists warn that without rapid federal intervention, a protracted deflation could lead to a series of economic and financial crises that outweigh the impact of the 2007-08 financial crisis. Without a steady influx of mortgage payments, banks and financing institutions will not be able to pay interest to investors who have bought bonds Supported by mortgage profits, according to the newspaper, Asharq Al-Awsat.

The US mortgage market is somewhat complicated and special. To simplify the matter, mortgage loans are funded through two sectors, one of which is a banker, subject to the rules of federal oversight, and a non-banker, not obliged to apply Federal Reserve restrictions, related to capital size. Both sectors offer bonds, backed by the profits of the mortgages they sell, but with interest rates that are lower than the profits and higher than the bank’s interest.

This system enables banks and financing institutions to collect the value of loans during a shorter period, by selling bonds. This helps accelerate the capital cycle of these institutions, and it also helps citizens obtain real estate loans at low interest rates. On the other hand, it provides safe bonds for investors looking for a safe investment and wanting regular benefits.

On the other hand, the Federal Reserve Bank of St. Louis expected that the unemployment rate in the United States would reach 32.1% in the second quarter of this year, indicating that the number of workers expected to be laid off could reach 47 million workers, if the virus continued to spread in the states.

The bank indicated that this rate exceeded the unemployment rate which reached 25% during the Great Depression in 1929, the highest rate witnessed by the United States.

The Fed’s economist, Miguel Castro, said that the United States has never experienced such an economic loss in the past 100 years. He wrote in a blog on the Internet yesterday: “These are very large numbers according to historical standards, but this is a somewhat unique shock, and it differs from all the shocks that the American economy witnessed in the past hundred years.”

Since the coronavirus hit the US states, early last month, millions of Americans have been laid off, many economic sectors and unnecessary businesses closed, and the tourism, travel and aviation sectors have collapsed. About 3.3 million people applied for unemployment benefits for the first time during the week before last, reflecting massive layoffs in various areas of the economy.

The bank warned that 66.8 million Americans work in occupations at risk of layoffs, including the sales, production, food and service sectors, and there are 27.3 million workers in occupations that require close proximity to other people, such as barbers, restaurant workers, and flight attendants, among others.

The continued closure of the economy threatens to collapse the mortgage industry. This will lead to subsequent crises in other sectors of the economy, the foremost of which is the bond market, where investments deemed to be safe will collapse.

Mike Frattantoni, chief economist of the Mortgage Bankers Association, says the US mortgage system has managed to cope with many difficult crises and natural disasters, but it was not designed to deal with such a crisis. He said: “During all the natural disasters that the United States went through, this system was working well, but it was not designed for something like this. Nothing can handle that, I don’t think. This is really a national emergency.”