An Unbalanced Mortgage Market - Vested UK

An Unbalanced Mortgage Market

An unbalanced mortgage market: Last week the Fed purchased $183 billion worth of mortgage-backed securities in an effort to drive down rates despite the Mortgage Bankers Association warning of a disruption which could be caused by such an action.

With already volatile market conditions, the Fed’s actions blew up the hedge fund mortgage bankers used as a shield to protect themselves against rate increases, reports CNBC. Some lenders are now facing margin calls that are consuming their working capital, thus threatening their ability to operate.

It’s “Titanic” for private equity and hedge funds: As per The Wall Street Journal, private equity and hedge funds have been barred from accessing taxpayer-backed loans intended to support small businesses struggling during the pandemic. The Small Business Administration states that both hedge funds and private equity firms cannot qualify for this money because “they are primarily engaged in investment or speculation.”

Hedge funds may still survive: Hedge-funds have seen better days than what the last decade provided. As profits wilted, investors turned to cheap index funds to make up their margins. However, hedge-fund managers have long warned that this investment trend may prove poorly in a time of crisis.  The chaos wrought on the market by the pandemic has brought light to that claim. As hedge-funds amounted to only 1% of assets under management in the first quarter, they have proven to perform better than market averages. Read more in The Economist for an in-depth look at why there are signs that the industry could gain in the long run.

Private Equity buyout debacle: At the height of the 2008 financial crisis, Washington struggled with whether to provide a government bailout to Detroit carmakers, many of which were owned by private equity groups.  Politicians are now facing a similar predicament regarding whether private equity owners should receive money as part of the COVID-19 economic stimulus package.

“We cannot have a world in which one can borrow to earn more and pay little taxes if things go up,” Ludovic Phalippou, a professor at Oxford university’s Said Business School told the Financial Times, “and when things go down then the taxpayer comes to the rescue.”

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