
Margin calls on mortgage lenders at unprecedented levels - ujeezy
https://www.cnbc.com/2020/03/29/mortgage-bankers-warn-fed-purchases-of-mortgages-unbalanced-market-forcing-margin-calls.html
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LatteLazy
Am I reading this right?

Brokers hedged their position to reduce the risk of rate rises, and when the
Fed came in and helped them out, they're now complaining they can't also claim
from the hedge. That's like blaming firemen for putting out your house fire
because you now can't claim as much from your insurance.

And some Brokers over-hedged. That's speculation and that's exactly what
unsophisticated, under capitalized, unregulated (for this purpose) retail
brokers are explicitly banned from doing. So again, what the fuck? They should
get margin called all the way to bankruptcy!?

There are a long list of laws dating back centuries about not being able to
insure property for more than it's worth. And that's what over hedging is in
this case: betting against the very product you create. It needs to be banned.
The people doing it need to be prosecuted, not offered sympathy.

~~~
onetimemanytime
The way I understood it, some benefited but some had already hedged so they
got screwed. In essence, the Fed disrupted the normal way of doing things and
_some_ bankers will get screwed. Oh well. :)

~~~
verroq
So the people that hedged their risks lost and the idiots that didn’t get
bailed out?

~~~
LatteLazy
Everyone was bailed out but the fed effectively. The people that hedged end up
a little behind, because they paid a premium to be hedged. Such is the joy of
fed action: the biggest risk takers profit the most. But no one has lost
because of this...

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csomar
I have no idea what's going on but here is my take: The mortgage lenders all
thought that the rates are going to go through the roofs. So they used money
that they should not use to _bet_ on that. They did not just hedge their
position, they over-hedged so that they can make free money when the rates
explode.

The fed intervened by lowering rates and now their positions are liquidating.
Apparently, this is not only gambling money and they might have over-leveraged
themselves with other money they legally/morally should not use.

Now they are calling for the FED to intervene and help them with their
mistakes. We'll see how this is going to unfold.

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Random_ernest
For everyone thinking of the 2008 financial crysis: My layman point-of-view is
that the market for mortgage backed securities in the US is nearly 20 times
smaller compared to 2006

[https://www.statista.com/statistics/275746/rmbs-issuance-
in-...](https://www.statista.com/statistics/275746/rmbs-issuance-in-the-
united-states/)

~~~
bradleyjg
Because we’ve nationalized the mortgage lending industry while keeping up a
very expensive veneer of a private market in the form of originators and
servicers. It’s the pessimal combination of capitalism and socialism.

~~~
viklove
Socialism for wealthy corporations, rugged individualism for the rest of us.
It's the American way.

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tareqak
I have a question that is related to the article, but maybe goes a bit beyond
it: why doesn’t the Federal Reserve buy the actual asset in question instead
of the mortgage-backed securities question? I had the same question after I
recently got a better understanding of the actions the Federal Reserve and the
US government took in saving Wall Street in 2008 via the TARP (my
understanding is still probably incomplete though as you can probably see from
this question) [0]. “Buying” the underlying asset off of the banks would have
saved the banks in the same way, but people would also have been able to stay
in their homes, right?

[0]
[https://en.m.wikipedia.org/wiki/Troubled_Asset_Relief_Progra...](https://en.m.wikipedia.org/wiki/Troubled_Asset_Relief_Program)

~~~
nradov
The administration and logistics would be significantly more complex. In
theory it's possible, but the Federal Reserve just doesn't have the manpower
to buy up individual mortgages.

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vkou
I have read this article five times, and I have come to the conclusion that
I'm either an idiot, or there doesn't seem to be any impropriety on the side
of the Fed, nor the mortgage holders.

Am I wrong?

This seems to be a perfectly reasonable use of derivatives - as a mitigation
of short-term risk... That happened to fall apart, because the Fed stepped in,
as an 'irrational' market actor.

~~~
jimhefferon
I thought the article's point is that ordinarily lenders only hedge for short
periods of time, but that because of the virus they are not closing the loans
and the hedges are hanging out there. Am _I_ wrong?

~~~
vkou
I don't think that's the problem. It sounds like the problem is that they are
holding both a loan, and a short, which is supposed to mitigate their exposure
to market swings until they sell the loan.

It's like an oil company shorting oil, to hedge the risk of the market moving
against them, before they can sell their inventory.

The problem is that the fed is now buying every asset under the sun, and
instead of their loan and their short being inversely correlated, they are now
uncorrelated, which is killing them.

The equivalent would be the oil company's oil dropping in price... While the
price of oil increases, this killing their short. This doesn't really happen
in properly functioning markets, but markets currently have huge liquidity
problems.

At least, that's what it sounds like.

~~~
getlawgdon
They hedged poorly. They bracketed their position using risk they couldn't
afford to take. Every market is unpredictable, and margin calls for poor risk
taking is the result.

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londons_explore
> Regulators have recommended a best practices guideline to collect margin on
> any variation above $250,000.

Can someone explain this statement?

~~~
dmurray
Say you have a long term position in a derivative (like a future, or a
mortgage bond in this case). If the market value of that goes up, the
counterparty pays you straight away, instead of waiting until it expires
months or years from now. Likewise, if it goes down, you pay the counterparty.
This payment is called variation margin.

Typically a bank will have a roughly hedged position: if one of its assets
goes down in value, another one goes up and it uses the variation margin on
one to pay off the other. But consumer mortgages don't get variation margin:
the homeowner doesn't pay the bank if interest rates drop and he now is locked
into (in hindsight) a bad deal. Instead he just pays the bank over the odds
for the next 10 or 30 years.

In some products you square up the variation margin every day or every week.
It sounds like the mortgage bonds aren't done that rigorously and the dealers
square them up whenever they feel like it, or when the regulator insists. Here
some mortgage banks are going to have to find the cash flow to pay that
variation margin, if they owe their dealer more than $250k in total.

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ddnb
so can the Fed keep this up indefinately? What are the consequences of these
actions? inflation? if so aren't we trading a crash for permanent(or at least
long-scale) lower purchasing power for all consumers?

~~~
pjc50
When talking of inflation we really do have to recognise that monetary
expansion only causes wage/goods/services price inflation when there is too
much money chasing too few things to buy. At the moment, the real markets are
all over the place but it looks like there is huge physical production
capacity which is idling. Inflation risk through demand is low.

It is quite hard to have inflation without _either_ near full employment
(can't hire workers without increasing wages) _or_ forex problems (foreigners
stop wanting dollars which seems .. unlikey)

What this is mostly doing is stopping a huge property crash. Maybe that's
overdue, but it would also mean ruining the retirement of a lot of the middle
class.

~~~
imtringued
It was too obvious to notice for but thanks for explicitly talking about it. I
always wondered why the insane cash injections of the fed never reach the
general public. Surely at some point some of that money is going to be used
for payroll but that point of time never came because everyone is
underemployed.

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peterwoerner
I mean people who can't work aren't going to be able to make rent. Landlords
then cannot make mortgage payments so they default. Mortgage lenders are now
up a creek without a paddle.

~~~
ivalm
More complicated is that the shorts on MBS which mortgage servicers use to
hedge their exposure to non performing loans are also losing money. As Fed
buys more and more MBS the loan services can no longer recoup money via their
hedge, can’t get payment out of borrowers, and often can’t even resell the
loan since lots of them are recently refinanced and now with forebarence have
not made their first payment.

~~~
alexpetralia
They can't sell their MBS to the Fed? Who exactly is the Fed buying from then?

~~~
ivalm
Owner and servicer are different companies.

Servicer does not own the loan, they simply paid an upfront cost to have the
right to collect payments from homeowners (from which they take a cut). So the
owner can sell their MBS to Fed to reduce uncertainty on their balance sheet,
but servicer is just stuck servicing the loan — they already paid the upfront
cost for the right to service the loan. That’s why they hedge by shorting MBS.

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rodgerd
Sure, why not, let's have the unemployment of 1929, the pandemic of 1918, and
the collapse of an unsound financial sector à la 2008. It'll be swell.

~~~
marcus_holmes
Well, we didn't actually have the collapse in 2008. It all got propped up in
the vain hope that the banking sector would stop doing stupid risky things.

Now we have the same choice. We can prop it all up again, in the vague hope
that bankers will change their behaviour. Or we can let Wall St go to the
wall.

If we do prop it up, we have to know that we'll need to do that again in
another 10 years, and again after that, and so on. Until the bankers change
their behaviour.

~~~
andrepd
The only thing that would change the status quo would be _personal_
responsibility to the criminals in charge, the actual persons, not a vague
concept of "system". Those that rigged the game, that live luxurious lives
beyond our dreams off bailouts that _we_ paid in a crisis that caused
suffering to billions of people.

If those responsible got life sentences en masse for their crimes which
probably killed far more people than any serial killer could hope for, then
maybe their ilk would think twice before doing that. When punishment is
effectively ZERO, then why not risk it?

~~~
hirako2000
It's a tight community that instigate and tolerate financial practices that
ultimately aren't benefiting of the average Joe, quite the contrary.

It's there for a reason, the same reason it's not stopping.

Unless there is a chance to beleive in representatives to truely represent the
population, it's a dead game.

We will slowly turn to cryptocurencies and detach ourself from this non sense
system of taxation and fiat decisions that are totally out of our control.

~~~
andrepd
>We will slowly turn to cryptocurencies and detach ourself from this non sense
system of taxation and fiat decisions that are totally out of our control.

What prevents the same sort of tight community of crony elites from developing
in such a system? It seems to me the course of action should be precisely
opposite: greater democratic control, better institutions, more literacy and
education so people can make informed decisions and pressure their
representatives.

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naveen99
Makes me think things are not as bad as they seem. I mean the service
providers are small potatoes in between the borrowers and the lenders.

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DailyHN
Is there a point at which the lender can screw up so much that the house
becomes property of the borrower?

~~~
tcbawo
No, the mortgage holder has a lien on a property, which can be assigned. Title
always remains with the lender. If ownership of a lien is unclear, it may be
unclear who ultimately owns the mortgage, but the mortgage servicer should
remain. Not a lawyer, but I believe the laws relating to the owner/mortgage
servicer relationship are designed to maintain consistency. A mortgage holder
needs to be able to show proof of ownership. In the 2008 era, there were cases
where this was lost and homeowners successfully challenged and had liens
removed.

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nonfamous
It wasn’t a very good hedge then, was it

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blackrock
Is anyone of the impression that houses should NOT be purchased by companies
like Zillow, Redfin, and Berkshire Hathaway?

After 2008, if the government had allowed the housing market to actually be a
market, then we wouldn’t have the housing crisis of today.

Instead, corporations with access to cheap money, spent billions to buy
distressed houses on the cheap, and held it for a few years, until it became
extra profitable for them to flip it at a very healthy profit.

The game is rigged, fellas.

~~~
pjc50
That _is_ a market. What might improve matters for actual humans is a non-
market solution of some kind of rationing. Max 1 per customer, locals
preferred.

~~~
hirako2000
I think the market would be totally fine as is.

Except that the average person doesn't have the same access to financing as
some minority of well connected entities to financing bodies. Access to cheap
or even free lending. The fed prints more money than the economy actually
creates.

It's a rigged market. That's why it doesn't work. Limiting properties would
attenuate the problem, but it's just a bandade solution, and a few will again
find loopholes to benefit.

~~~
pjc50
> the average person doesn't have the same access to financing as some
> minority of well connected entities to financing bodies

That's .. also a market. The institutions have substantially greater ability
to pay back, and in the case of banks, capital requirements that reduce their
credit risk. They don't have the same loss of income risks as a human. Nobody
should expect a market to produce a _fair_ outcome from an uneven initial
distribution.

Is there any evidence that access to Fed capital is controlled by political
connections on an institution by institution basis?

