Investment
Will COVID-19 infect mortgages and RMBS?

The current market corrections caused by the COVID-19 pandemic and subsequent shutdowns have sparked warnings from some not to forget the lessons of 2008 - especially, don't underestimate mortgage defaults.

Thomas J. Barrack, a US private equity real estate investor and founder and chair of Colony Capital, this week warned that commercial mortgage markets are in jeopardy.

"The market for commercial real estate mortgage loans in the United States stands on the brink of collapse," Barrack said.

"The profound impacts of both the COVID-19 pandemic and the public health measures taken in response to it on the American economy have caused high-performing mortgage loans, grounded in solid economic fundamentals, to suddenly and sharply decline in value."

Barrack - who reportedly has a close relationship with US President Donald Trump - warned that banks, publicly-traded mortgage REITs and other non-bank lenders could find themselves in a precarious situation.

He added that the action of these institutions in the coming weeks and months could have implications for the US economy as a whole.

"At a moment when liquidity is essential to avert public panic and to facilitate investments that respond to rapidly-changing and unprecedented economic conditions, the real estate financing market is in danger of inciting a liquidity freeze," Barrack said.

"A market collapse of this magnitude would have catastrophic follow-on effects across the American economy."

Meanwhile, closer to home La Trobe Financial (a non-bank providing funding and investments) has assured financial advisers and investors that it has no liquidity issues.

"There's no liquidity stress at La Trobe Financial," chief investment officer Chris Andrews said.

"Given the extent of the crisis, we are overweight cash in our shorter term funds to ensure we can meet redemptions."

La Trobe's working case for the economic outlook in terms of COVID-19 is slightly bleaker than others.

It predicts 12.5% unemployment and -6.9% GDP. Bill Evans at Westpac is more optimistic, predicting -3.50% GDP and 11.1% unemployment.

Others, like Citi and Goldman Sachs think unemployment could be lower - 8.4% and 8.5% respectively.

"The epicentre of job losses is in services," Andrews said.

"And these jobs are essential to the economy. They will bounce back once the virus cases lessen."

He added that the Australian government's $189 billion stimulus package was "confidence inspiring".

Read our full COVID-19 news coverage and analysis here.

Read more: CitiLa Trobe FinancialBill EvansChris AndrewsColony CapitalGoldman SachsPresident Donald TrumpThomas J. BarrackWestpac
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