Today, DJ Gardner from First Magnus Financial explains what liquidity is for lenders and why it is important to you, if you are thinking about purchasing a home or condo in today’s real estate market.
What happens when Investors, overnight, stop investing in certain types of loans? First, Lenders stop offering them. We have seen a lot of this lately. Next, Lenders that had made these loans, now have nowhere to sell them. Their warehouse sources make margin calls, forcing the Lenders to come up with cash. But the Lenders need to sell the loans to get the cash. If the Lenders do not have other sources of liquidity they may be forced out of business. We have seen a lot of this as well. Many very fine companies could not meet their margin calls. The next thing is what we began to see this week. Investors, mutual funds, hedge funds, etc. need to mark their assets to market every day. If no one is buying a particular asset, the value of that asset is difficult to determine. Fund managers cannot distribute fund assets, if they do not know the value of the fund. So they deny withdrawals from the fund causing fund investors to hold what assets they can get their hands on in highly secure, highly accessible investments.
This is a liquidity crunch. This week, the Fed and other central banks around the world have helped as they can, by providing more money in the banking system. In the weeks to come, they may choose to make it easier for banks to borrow money by cutting discount rates. The US market now believes the Fed will cut its discount rate before the end of September.