(Bloomberg) — Mortgage bankers are sounding alarms that the Federal Reserve’s emergency purchases of bonds tied to home loans are unintentionally putting their industry at risk by triggering a flood of margin calls on hedges lenders have entered into to protect themselves from losses. In a Sunday letter, the Mortgage Bankers Association urged the U.S. Securities and Exchange Commission and the nation’s main brokerage regulator to address the problem by telling securities firms not to escalate margin calls to “destabilizing levels.” The MBA, whose members underpin the housing market, asked the watchdogs to issue guidance directing brokers to work constructively with lenders. The rally in prices for mortgage-backed securities that’s been fueled by the Fed’s large-scale buying is “leading to broker-dealer margin calls on mortgage lenders’ hedge positions that are unsustainable for many such lenders,” the trade group wrote in its letter to SEC Chairman Jay Clayton and Financial Industry Regulatory Authority President Robert Cook. Finra declined to comment. The SEC didn’t respond to emails seeking comment.
“Broker-dealers’ margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the past week,” Broeksmit wrote. “The inability of a large set of responsibly-managed lenders to meet these margin calls would jeopardize the very objective of the Federal Reserve’s agency MBS purchases — the smooth functioning of both the primary and secondary mortgage markets.”
In a related development, two of the nation’s leading hotel trade groups on Friday sent a letter to top U.S. financial watchdogs that asked the SEC for “the removal of regulatory hurdles” to help shore up the market for commercial mortgage-backed securities tied to the industry’s assets. The American Hotel & Lodging Association and the Asian American Hotel Owners Association said their members wouldn’t be able to meet requirements to service CMBS as the coronavirus pandemic shrinks demand in the industry.