Rates Higher??? Will Just See About That - The FED Will Be There
Excellent must read article by Chris Whalen of the Institutional Risk Analyst and one which I must share with my readers here at Magnelibra Econemotions. Here are a few key lines we took away:
The price of an MSR (Mortgage Servicing Rights) is not just about cash flows and prepayments, but it’s also about default rates and the relationship with the consumer.
We don’t think that the Fed is going to take its foot off the short end of the curve anytime soon, in part because the system simply cannot withstand a sustained period of rising rates.
The article ends with this obvious takeaway to this question, Is not the FOMC in charge of the U.S mortgage market?
“No, the market rules. Today you can make more money selling a new 1-4 family residential mortgage into a 2.5% coupon from Fannie, Freddie or Ginnie Mae at 105. You book a five point gain on sale and are therefore a hero. And a year from now, after the liquidity does in fact migrate down to 1.5s c/o the beneficence of the FOMC, you can again be a hero.
Specifically, you call up that same borrower and refinance the mortgage into a brand new 1.5% Fannie, Freddie or Ginnie Mae at 105. You take another five point gain on sale. Right? And who paid for this blessed optionality? The Bank of Japan, Peoples Bank of China, and PIMCO, among many other fortunate global investors.
These multinational holders of US mortgage bonds may not like negative returns on risk free American assets, but that’s life in the big city. And thankfully for Chairman Powell, it's not his problem. Many years ago, a friend in the mortgage market said of loan repurchase demands from Fannie Mae: "What do you want from me?"
The reality is obvious, and one which we will continue to hammer home, IF CENTRAL BANKS CONTINUE TO FUND DEBT THEN INTEREST RATES WILL CONTINUE TO FALL!
As for the savers, well just keep accepting negative yields on your cash, keep parking your 401k in the equity markets and pray that the system never fails, its worked for decades and it will most likely continue to work for a lot longer than people can rationalize. Look we don’t like it as Austrian Economists at heart, but what we think doesn’t change the facts, the system is what it is and we must go along with it, its ugly but then again, it ain’t no beauty contest.
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-Magnelibra Econemotions
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