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Margin calls on mortgage lenders at unprecedented levels

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Re: Margin calls on mortgage lenders at unprecedented levels

#31

Post by alexpetralia »

ivalm wrote: post #14
peterwoerner wrote: post #10

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.

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.

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

Re: Margin calls on mortgage lenders at unprecedented levels

#32

Post by dmurray »

londons_explore wrote: post #8

> Regulators have recommended a best practices guideline to collect margin on any variation above $250,000. Can someone explain this statement?

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.

Re: Margin calls on mortgage lenders at unprecedented levels

#33

Post by 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.

Re: Margin calls on mortgage lenders at unprecedented levels

#34

Post by chrisco255 »

cbogie wrote: post #5
rodgerd wrote: post #2

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.

really not hoping for a world war to boot.

I think there will at least be a new cold war.

Re: Margin calls on mortgage lenders at unprecedented levels

#35

Post by getlawgdon »

vkou wrote: post #25
jimhefferon wrote: post #23

Earlier quoted context omitted.

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?

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…

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.

Re: Margin calls on mortgage lenders at unprecedented levels

#36

Post by getlawgdon »

Cthulhu_ wrote: post #9
rodgerd wrote: post #2

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.

It's ironic that the economy / stock market hasn't become more resilient since 2008, despite more measures being taken. I mean sure, it's more difficult to get a mortgage you can't pay now (speaking for myself), but there's so much more fragile stuff that has been added in the past ten years; for example, a lot more amateurs have jumped into the stock market because one, savings interest rates have plummeted to effec…

The economy and the stock market are not equivalents.

Re: Margin calls on mortgage lenders at unprecedented levels

#37

Post by andrepd »

hirako2000 wrote: post #24
andrepd wrote: post #15

Earlier quoted context omitted.

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…

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…

>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.

Re: Margin calls on mortgage lenders at unprecedented levels

#39

Post by gonzo41 »

DailyHN wrote: post #38

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

Well they could loose so much you essentially end up squatting in your own house. And if it happened to enough people you could hopefully just wait it out until you had a claim. But America being America. You'd have a local sheriff there smash down doors with the local SWAT team to reclaim the assets for someone who bought the debt on the cheap.

Re: Margin calls on mortgage lenders at unprecedented levels

#40

Post by tcbawo »

DailyHN wrote: post #38

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

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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