Mortgage Market Remains “Strained,” Says Fed’s Kroszner

While the tone in global capital markets has improved from its most recent nadir in March, mortgage markets remain largely locked up as investors await a recovery in key housing market, the Federal Reserve’s Randall Kroszner said Friday morning.

“Strains continue to result in restrictive conditions for home-mortgage borrowers,” Kroszner said in prepared remarks at Boston College. “Securitizations of non-agency mortgage products remain stalled and new originations are being held in lenders’ portfolios, pressuring their balance sheets and, for example, leaving the spread between interest rates offered on jumbo and conforming mortgages very high.”

The so-called private-party mortgage market has remained stalled for roughly a year now, and while banks have raised more than $80 billion in capital thus far to fund operations, Kroszner suggested that more capital was likely to be needed in the months ahead.

“Financial institutions should continue in their efforts to raise capital,” Kroszner said, suggesting that “investors continue to be concerned about the economic outlook and the performance of specific industries and firms.”

Investors may well have reason to be worried. The economic outlook took a significant turn for the worse Friday morning, with the Labor Department reporting that the nation’s unemployment rate jumped to 5.5 percent in May — the largest monthly rise in jobless claims since 1986. Stocks tanked as a result, with the Dow Jones giving up as much as 240 points in the first few minutes of trading Friday morning.

Any economic difficulties will likely exacerbate problems in the nation’s housing supply, potentially leaving mortgage markets in the cold for the majority of the remainder of the year.

“The difficult conditions in the mortgage securitization markets, of course, put strains on the housing market itself,” Kroszner said. “Recovery in the mortgage markets themselves is also likely to be tied to recovery in the housing markets.

“I expect housing markets to recover only gradually as demand rebounds and excess inventories are worked off.”