Investors show concern over defaulting mortgages as possible recession looms

Investors are reportedly concerned about mortgage defaults and are unloading Fannie Mae and Freddie Mac securities, amid record-high interest rates and a rapidly cooling housing market. 

Mortgage rates last week hit a two-decade high of 6.92%, a trend that has slowed the booming, often over-priced real estate market during the height of the pandemic.  

The increasing rate for a 30-year fixed-mortgage comes as the Federal Reserve increases interest rates in an attempt to cool inflation that also risks moving the country into a recession, The Wall Street Journal reported Wednesday.

The mortgage-backed securities are bonds secured by real estate loans, which are sold to be used as collateral for the new security, which investors receive monthly interest and principal payments for, according to FINRA, a not-for-profit that oversees U.S. broker-dealers.

Investments in mortgage debt backed by Fannie and Freddie are considered to be more risky, and some investors are off-loading them. Prices of these credit risk transfers are declining and investors are demanding more compensation to hold the securities.

Traditionally, the housing market is one of the first signs of a faltering economy, yet experts agree that the risks involved in the mortgage finance system are better than in the mid-2000s, when the mortgage market collapsed.