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You likely remember it was largely a subprime mortgage crisis that brought about the national 2008 financial crisis. Here’s an abbreviated version of what happened: Throughout much of the 2000s, a housing bubble in the U.S. grew to a positively enormous size. It was inflated by relaxed loan underwriting standards, as well as unique mortgage products that required little borrower documentation. As a massive wave of borrowers struggled to meet their obligations, payments were missed. When that happened, the mortgage-backed securities began to fail. The world’s biggest banks had tied much of their own financial fortunes to those securities. And so the banks themselves began to fail.
Fast-forward to today. A worrisome consequence of the current coronavirus-sparked economic crisis is the sudden, massive spike in unemployment. Over the previous three weekly reporting periods, nearly 17 million Americans have joined the ranks of the unemployed. The Federal Reserve estimates that the unemployment rate could reach 32% – a figure exceeding Great Depression levels.
One of the most prominent dangers of having this enormous number of jobless Americans is potential mortgage market instability. The impact to the financial system of a sudden and massive increase in nonperforming loans could be catastrophic. One expert goes so far as to say the fallout could be worse than during the 2008 financial crisis.
This Crisis “Could Be Far Deeper than the Subprime Crisis”
The recently passed CARES Act stimulus package contains a feature that could be especially helpful to a large number of America’s mortgaged homeowners. Borrowers with government-backed mortgages must be allowed to defer payments for at least 90 days. In some cases, they can defer payments for a year. Any deferred payments must be made eventually. Still, unemployed homeowners can gain badly needed breathing room through payment deferral.
Unfortunately, what may be good for the individual homeowner is not necessarily good for the financial system.
In fact, the mortgage system as we know it could be at risk of collapse. Here’s why: The mortgage servicer is the company you make your monthly payment to. The servicer pays mortgage bondholders with the money they collect from homeowners. You can already see the problem brewing. If a significant number of borrowers take advantage of the CARES Act’s forbearance provision, the servicers could run out of money to pay the bondholders. That could prompt a failure among servicers. If servicers fail, both the orderly collection of borrower payments and delivery of that money to bondholders would be in jeopardy.
The problem could become worse if unemployed renters can’t make their monthly payments. Economist Carl Weinberg discussed the skyrocketing unemployment rate as a recent guest on CNBC. During his appearance, Weinberg described how even renters could play a part in the looming financial crisis. Weinberg connected the dots this way: “If people don’t pay their rent, then the landlords can’t pay their mortgages. The banks would have to write off the mortgages … the asset-backed securities then fall into a dark hole.”
Yes, it could be worse. The housing and mortgage markets are at least more inherently stable today than they were when the 2008 crisis was fast approaching. Americans today enjoy record amounts of equity in their homes. But according to Sanjiv Das, CEO of mortgage servicer Caliber Home Loans, that advantage may not last.
“So, a large number of customers still have disposable cash, and I think that’s helping us a little bit,” Das told CNBC recently. “However, if unemployment gets as deep as some people are predicting, if it gets to the mid-teens, then it could be far deeper than the subprime crisis.”
The problem is complicated by the possibility that forbearance itself may not be all it’s cracked up to be.
In a recent USA Today article, some homeowners sounded an alarm over what they say banks are telling them about the forbearance. They claim they’ve been told they will have to pay their missed payments in one lump sum once their deferral period is over. Wells Fargo, Bank of America and Chase are identified in the article as banks that homeowners say are demanding the lump-sum make-up payments.
The homeowners are concerned about the consequences if they’re unable to make up missed payments over an extended period. Anthony Adams of Orlando, Florida tells USA Today, “I feel like I’m in this odd Catch-22. I can get some immediate relief from postponing a mortgage payment, but the cost of that relief will put me further into debt.”
According to servicers, mass forbearance already poses an enormous risk to the financial system. If the repayment schedule becomes particularly onerous for homeowners, that could place even greater pressure on the entire system’s stability.
Gold Can Help Reduce Exposure to Another Mortgage Crisis
The present economic crisis reminds us just how delicately balanced the financial system is. Even highly developed nations can be brought swiftly to their knees by a “black swan” event such as the current pandemic. Very quickly, the multitudes of shuttering businesses have triggered massive unemployment which, in turn, now threatens the global financial system.
The most immediate priority for retirement savers is restoring stability to their portfolios. Another priority is ensuring portfolios are configured to limit damage that can be inflicted suddenly by a crisis event. One way to help accomplish both goals is to include physical gold among your holdings. The metal’s most attractive feature is perhaps that it’s fundamentally uncorrelated with risk assets. As a result, gold has the potential to greatly reduce portfolio volatility that can arise from economic turmoil.
You know about gold, but have you ever owned it? If not, then you likely have a lot of questions. Let award-winning Augusta Precious Metals answer them for you.
When you call Augusta at 800-700-1008, you’ll reach a team of economic analysts with expert knowledge about physical gold and silver. Callers with portfolios worth at least $100,000 will receive our free, informative guide on retirement protection. Those same callers also can reserve a space to participate in our complimentary Profit & Protect Web Conference. This live presentation on retirement protection is hosted by Devlyn Steele, Augusta’s senior economic analyst and Harvard Business School Analytics Program member. It’s the same conference that made Hall of Fame quarterback Joe Montana an Augusta customer and now our corporate ambassador.
We could be looking at another mortgage crisis, thanks to the pandemic. It might even be bigger than the one that triggered the 2008 collapse. I realize this may be difficult to believe. However, nearly 17 million Americans have joined the ranks of the unemployed in just the last three weeks. Who saw that happening a scant two months ago? The prudent retirement saver looks for ways to help protect his portfolio now and going forward. To learn more about how physical gold can help, contact Augusta Precious Metals today.