As Ronald Reagan once said, “The most terrifying words in the English language are: I’m from the government and I’m here to help.” The same applies to The Federal Reserve.
(Bloomberg) — The Federal Reserve’s emergency rescue of the U.S. mortgage market should have set off celebration among lenders trying to keep up with demand from borrowers. Instead, executives at Quicken Loans got a hefty margin call.
That was just a fraction of the pain the Fed unintentionally inflicted on lenders in mid-March when it announced plans to buy a massive amount of mortgage securities. The move, meant to steady the market, caught many lenders by surprise and tipped their routine hedges deep into the red.
It’s added to strains throughout the industry that have left the gap between mortgage rates and benchmark Treasuries the widest since 2009. Back then, bank failures and concerns about the housing market kept home loans from becoming cheaper for borrowers. Now, it’s obscure parts of the financial world that are holding back efforts to shave thousands of dollars from many Americans’ biggest expenses — their mortgages.
“The Fed came in trying to help, but they overshot,” said Phil Rasori, chief operating officer of Mortgage Capital Trading Inc., which says it handles hedging for about 20% of the mortgage market. He estimates margin calls initially drained as much as $5 billion from lenders before the Fed eased off, posing “an existential threat” to some nonbanks that operate on thin cash cushions, selling off loans as soon as they’re made.
Mortgage lenders promise to lock in interest rates for borrowers weeks before loans are finalized, then hedge that risk by shorting mortgage-related securities. But the Fed’s buying drove up prices for those assets, turning the safeguards into sudden demands for cash. Quicken, among the largest U.S. mortgage lenders, met its obligations during the period, spokesperson John Perich said.
Then there was this headline: “New York Fed Says It Will Begin Buying ETFs in ‘Early May’”
Is Jerome Powell really Sid Vicious? At least for Quicken.
A tip of the hat to Jesse from Jesse’s Cafe Americain!