The Mortgage Bankers Association has asked federal regulators to address a growing concern caused by broker-dealers making margin calls on mortgage lenders’ hedge positions, an issue the MBA said is threatening mortgage lenders across the U.S.

MBA President and CEO Robert Broeksmit sent a letter yesterday to the SEC and FINRA asking the agencies “to call on their regulated broker-dealers to work constructively with their mortgage lender counterparties in response to the COVID-19 outbreak.”

The Federal Reserve recently began large-scale purchases of mortgage-backed securities. Mortgage lenders, according to the MBA, have hedged risks against price fluctuations by taking short positions in the market because loan values could fall prior to their sale in the secondary market.

Broker-dealers have been making margin calls on these hedge positions. Because of dramatic price changes, the MBA said, broker-dealers’ margin calls on mortgage lenders “reached staggering and unprecedented levels by the end of the past week.”

“For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate,” Broeksmit said in his letter. “MBA has been made aware of many cases in which lenders in strong financial positions only a few days ago will not be able to meet these margin calls after only another day or two of market movements at the pace observed last week.”

Broeksmit added that the functioning of the primary and secondary markets would be in jeopardy if a large set of lenders could not meet these margin calls.

“As such, MBA urgently requests that FINRA and the SEC issue guidance to the nation’s broker-dealers, making clear that margin calls on mortgage lenders’ TBA hedge positions should not be escalated to destabilizing levels,” Broeksmit said. “Absent such guidance and an immediate shift in broker-dealer practices, the U.S. housing market is in danger of large-scale disruption.”