Is The Mortgage Market Facing The Unintended Consequence Of A Fed Inspired Liquidity Crisis?

By | August 25, 2016
unintended consequences of the Feds reluctance to raise interest rates

Could interest rate inaction by the Fed bring the hammer down on the residential real estate market?

In other words, despite the fact that mortgage rates are at cycle lows, could the reticence on the part of the Fed to raise rates actually bring the hammer down on mortgage originations?

Kroll Bond Rating Agency Senior Managing Director Christopher Whalen thinks so!

“Policymakers are not watching spreads. There is a liquidity problem — this is a near-term concern.”

The tenuous position of money flowing through the mortgage market could “grind home sales to a halt.”

From CNBC, “Regulation is up, rates are down and widening credit spreads suggest a lack of demand in the market on which mortgage lenders depend. Even as home sales surge to nearly a nine-year high, Whalen said a combination of unnatural monetary policy and restrictive regulations could critically wound the mortgage market, at a time when central bankers are left with few levers to pull in order to sidestep a crisis.

It could grind home sales to a halt and put the brakes on a market that, Whalen said, is expected to generate $1.6 trillion in originations this year.

Mortgage lenders continue to see pressure on their margins from low interest rates. Liquidity for mortgage servicing rights has tightened, in part due to regulation limiting the number of players in the market, KBRA notes.

Similarly, secondary market liquidity for whole loans, mortgage securities and U.S. bonds is tightening. At a time when it’s increasingly difficult for a mortgage servicer to turn a profit, Whalen said the next leg of the tightening scenario may mean higher fees for homebuyers.

“While many aspects of the 2010 Dodd-Frank legislation were well-considered and necessary, KBRA is concerned that the cumulative effect of monetary policy actions, and prudential and consumer regulations, may be creating the circumstances for a future liquidity crisis…

Key Points From The Kroll Bond Rating Agency (KBRA) Report, “Low Rates, Low Growth & Falling Market Liquidity.”

  • KBRA notes that there is a growing lack of liquidity in some of the most important U.S. markets for residential mortgages and related securities, a lack of business volumes driven by low or even negative interest rates and excessive regulation. We believe that the combination of restrictive regulations on credit creation, unnecessary increases in capital and liquidity requirements for banks, and the deflationary effect of low interest rates are potentially producing the circumstances for a serious liquidity crisis.
  • KBRA believes that without relief in terms of higher interest rates and meaningful regulatory reform, smaller non-bank seller/servicers operating in the U.S. mortgage market could fail. If that occurs, advocates of increased regulation may be surprised to discover that the creditors of these entities may simply abandon unprofitable mortgage servicing portfolios.
  • KBRA believes that regulators and policy makers need to take notice of the dwindling liquidity in and capital available to support the markets for mortgage servicing rights, mortgage-backed securities, and even government securities, and consider what it says about the economic model for lending, loan servicing and securities dealing in the current regulatory environment. (Source)

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at or at 516.741.4723.


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