Fed's 'Trickle-Down' Policy Lines Pockets Of Mortgage Originators

Tyler Durden's picture

The yield on MBS has been crushed over the last few weeks (front-running from before QEternity and then afterwards as every manager with a balance sheet warehoused as much as possible to sell back to the Fed). This rally has reduced the spread between 'risky' MBS and supposedly risk-free US Treasuries to practically nothing as the Current Coupon 30Y MBS trades around 1.67%. However, where the real differential has occurred is in the spread between the risky wholesale rate that Main Street is charged on their mortgage and the government-sponsored wholesale rate they finance this debt at. The spread between wholesale and retail mortgage rates has never been higher (in absolute and ratio terms) providing a new ATM for all those banks and mortgage originators trying so hard to scrape by these days. We just assume the Fed's policy transmission-channel had modeled this trickle-down of mortgage banker bonuses (and taxes) into local Ferrari dealerships and Lafite wholesalers.


The lower pane shows the spread between the retail-facing mortgage rate that Main Street pays and the wholesale-facing cost of funds for those mortgages...


and given leverage and capital (and the now risk-free nature of MBS apparently) - perhaps a ratio of the two is more useful - and much more telling of the disconnect...


Charts: Bloomberg

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fonzannoon's picture

Yes but when the people who work for those mortgage originators throw a dollar into the jar for whatever cause is being represented outside their supermarket that dollar makes it's way to the people. You have to take it a bit further to see how the trickle down effect makes it's way to us eventually.

SemperFord's picture

Yeah but that's like government workers, they don't produce anything we want, at least not for me. So we are taxed to pay for their wages, means less money for us, I'd rather not pay higher taxes and have them be productive and keep more cash for me.

Lord Koos's picture

Right, because you don't need the weather service, national parks, scientific research, safety inspections of any kind, freeways, the postal service, disaster relief, etc etc.

SemperFord's picture

Dont need most of them...we could do with 1/3 to 1/4 of gov workers. Means less taxes, most of them are glorified welfare queens and would not have a job in the private world! But if anybody wants tons more government workers, please put yourself on a list and pay higher taxes than everybody else.

sgorem's picture

"Right, because you don't need the" - weather service (probably 100% chance of daylight tomorrow?), national parks (what's the question?), scientific research ( millions of taxpayer dollars to study the asshole of the zimbeezee fly of southern Argentina?), safety inspections of any kind ( salmonella & E-coli outbreaks each and everyday across the country), the postal service (need I expouse here?), diaster relief (Katrina comes to mind?) etc., etc., etc., etc., etc., etc.................

Thisson's picture

Are you putting us on?  Who the fuck needs the weather service?  The postal service?  I don't need any of that stuff.  National parks?  We'd have plenty of green space if government wasn't subsidizing so many industries that create sprawl.  Disaster relief?  Yeah, they handled Katrina real well.  Look - private sector and charities can do a better job than government does.  Government is just a parasite on the back of the working person.

DonutBoy's picture

Ha!  That is f**king funny.  So true. We're going to rebuild the nation's economy by giving the financial parasites free money!  What an awesome plan!


SemperFord's picture

in theory but truth be told, prices will be going up higher/faster than the perceived value of those dollars so it will not work.

rayduh4life's picture

Money has a natural buoyancy. 

FL_Conservative's picture

I'm glad it's helping someone....cuz it sure as shit ain't helping the people that need it.

devo's picture

I think bank stocks are going to sore this earnings season. Not saying it's right...just saying it will likely happen. Gross's BOND fund should keep chugging, too. Bernanke said policy helps savers because savers own homes. I don't, mutherfucker. DIE.

Conman's picture

Banks stock soar on what? Lowest trading volumes ever and almost no m&a activity? I think they will soar on more loan loss reserve releases and the typical BS accounting tricks.

devo's picture

Yes, accounting tricks, the FED absorbing their balance sheets, more risky/subprime loans, etc. Again, not saying it is right...just pretty clear Let's just wait a couple weeks and see. If I'm wrong I'll eat my hat (because lord knows I can't afford food!).

Conman's picture

I'm more curious where they will make up the "gains" from DVA which has been thier bread and butter to beat expecations.

LMAOLORI's picture



Good news devo you won't have to eat your hat they have already been going up and since we are not allowed to see who has RATS I am sure it will continue. 

Banks: A Bright Spot Amid Earnings Gloom Expect third-quarter fireworks out of the financial sector


Drilling down to some of the biggest names in banking reveals even more astounding gains. The nation’s largest banks by assets, JPMorgan Chase (NYSE:JPM), and Bank of America(NYSE:BAC) are each up 14% for the quarter-to-date. JPMorgan has sloughed off the London Whale trading fiasco, while BofA has been quietly enjoying improvement in its business and its balance sheet.

More impressively, beaten-down investment banks have staged a remarkable run. Goldman Sachs (NYSE: GS) has gained more than 20% in the third quarter, and rival Morgan Stanley(NYSE:MS) is up 16%.

Meanwhile, outshining them all is Citigroup (NYSE:C). Yes, the original too-big-too-fail financial supermarket has seen its stock rise about 22% for the quarter-to-date.

Some people think that's great  (I'm not among them)

Democrats are “optimistic it will have a positive impact on the economy,” House Minority LeaderNancy Pelosi of California told reporters. “It already had an impact on the stock market,” she said. “So from a confidence standpoint it has already had an effect.”

Pelosi said the Fed’s action is needed because “Republicans have refused to support many of the initiatives” that Obama proposed to create jobs. If Congress had acted on the president’s job-creation legislation “we could be farther down the road in the economy recovery.”

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said in a statement that “we should be using every tool in the toolbox to create jobs and spur growth, so it is encouraging to see the Fed continue to take aggressive action to stabilize the overall economy.”


devo's picture

Nice, I'd rather not eat my hat.

I think a big part of those moves were insiders front running the MBS purchases. A lot of people are still bearish on bank stocks, so there's upside potential. ZH readers will neg me for writing that, but I try to stay reasonable...like, I know banks suck and one day will have to be allowed to fail or break up. But until then I'll do whatever I have to in order to protect myself from the Bernanke.

Conman's picture

Whats tehre to neg you for , but dont buy into the BS that theres lot of people short anything. This market doesn't suggest that there's many unhedged shorts out there at all.

bornlastnight's picture

Fancy Nancy doesn't know shit from Shinola.  If she's so hot to trot for new jobs, she should wisper in Barry's ear to stop the EPA from crippling private industry with their asshat ragulations.  By the way, San Fran Nan is improving on her bitter outlook on life.  She's only blaming the Republicans for Barry's inexperience and poor decisions.  Looks like she gave Bush a pass on this issue.  How noble of her...GAWD, NOVEMBER CAN'T COME TOO SOON!


devo's picture

Edit: *soar*. Good catch.

Sore or soar? Would make a good headline for an article on bank stocks.

JR's picture

And for this the signers of the Declaration of Independence pledged their lives and fortunes to guarantee the greatest good to the greatest number, to secure "the opportunites they had found in a new land permanently guaranteed to themselves and their descendants" -- The Fed, the most blatant, freedom-sapping scam in all of history.

Thanks to calgal today: 

Public Will Be Slaughtered as Fed is Setting Up the Biggest Pump & Dump the World Has Ever Seen


"Mannarino states the 1,000 million dollars a day in QE3 being used t0 attempt to re-inflate the housing bubble is attempting to remove risk from the banks, who can now package all mortgages and dump the MBS to the Fed.  However Mannarino states that the plan will not work to re-inflate the housing bubble DUE TO INFLATION.   The Fed believes money will come out of equities and will go into housing due to their plan."

darteaus's picture

Well, DU-Freaking-UH!

They get fees for loan origination, and the US will immediately pick up the risk, since they buy conforming loans.

So, of course, brokers are going to originate a loan, sell it and get the fee:  THE GOVERNMENT IS PAYING THEM TO DO THIS!


FLASH: Drug dealers make money selling drugs!

Henry Hub's picture

And these scumbags that do reap the rewards of these reprehensible policies are whining that we don't respect them enough. What a joke!


buzzsaw99's picture

Damn! I thought for sure qe would trickle down this time. [/sarc]

azengrcat's picture

Home builder financing in my case:

1) Home builder (HOV) gives a bunch of free upgrades in exchange for financing through them (mircrowave overns, custom kitchen deliveries, refrigerators etc.)

2) Home builder flips mortgage to Wells

3) Wells flips to the Fed

4) Those guys ain't dumb

5) Money for nothin' and chicks for free

Village Smithy's picture

And I always thought that they were talking about MTV. Nicely done.

vote_libertarian_party's picture

So how does it play out?  Assuming the Fed is buying MBS at par and they are really worth 20-80% of par.


In 20 - 30 years they fess up the bonds have losses?  


I've never seen a good write-up on how all of this unfolds at the Fed.

devo's picture

They probably will pull an accounting trick, like amortize the purchases over 30 years and not adjust for inflation. lol

LMAOLORI's picture



I think the Fed has a few tricks up it's sleeve


HOT Fed Hides Major Accounting Change


'Reuters has a very hot story out tonight on an accounting change the Fed snuck into a regular weekly report. It will move off its balance sheet any bad debt the Fed may have purchased from Goldman Sachs, or anybody else for that matter.

But they are averting asking the Treasury for money in the future by an accounting gimmick that will simply dump the debt off its own balance sheet and onto that of the Treasury.'



max2205's picture

Just got one. I feel dirty

chunga's picture

MBS are risk-free as Tyler points out.

Despite the fact that many of them are not legally backed by anything.

BREAKING: NY AG sues JPMorgan Chase over mortgage-backed securities; case first of series expected against banks by WH task force - WSJ

We shall see...

newworldorder's picture

Except for home buyers needing to have real jobs that pay real money, in theory this might work. Bury the bad assets at the FED, - never or for 30 years - to see light of mark to market accounting and instantly the Banks are made whole.

No free lunch for individual buyers however, as this would create "moral hazard." Can't have that now. How else are the little people going to learn financial discipline?

Arnold Ziffel's picture

Mortgage originators are handing zero down mortgages to any warm body that enters the room. Housing will not recover for years.

waylon153's picture

Simply not true.  I'm a mortgage originator and you can ask me anything you want. 


The only zero down mortgages are VA loans which are entirely "insured/guaranteed" through VA funding fees, past and present.  The taxpayer is not liable and the loans are underwritten in the most sensible way of any loan on the market.  The VA actually accounts for your cell phone bill, cable tv, food, gasoline, etc.  The worksheet calculations are part of the loan process.  FHA and Fannie Mae don't do that.  At last, the military finally got something right.  Semper Fi.


Housing is recovering but not how you can see it.  70% of the transactions are refinances.  People are trading the remaining 25 year mortgages into 10  or 15 year mortgages at the same payment.  The trickle down can't be seen because they are building equity instead of more money in their pocket.  The rise in equity is invisible.  But, it's there and in 7-10 years they are going to have massive downpayments for larger homes.  Think of 50-70% downpayments.  These are not isolated accounts.  I see this everyday of week.

Thisson's picture

What about all the FHA 3% down loans, Waylon?  Piggyback loans still going on too?

sbenard's picture

Since the Fed is monetizing the mortgage market, why not just "originate" a mortgage for everyone? It doesn't matter whether the mortgagee qualifies or has any income, since the Fed is simply monetizing every debt instrument in sight anyway.

Needless to say, this whole QE thingy has taken on an air of insanity! This is going to go down as the largest bubble in history! Historians will fault us for not seeing it coming!

NaiLib's picture

Well, day after day CSFB Barclay and the rest are continuing to expand the multiples on the markets in Europe. Thay all compete to be the one that pays the most for Futures, then covered in the market of the underlying stocks. Market is about to resign to the CBs manipulation and soon enough volume will shrink even more as the real investors will refrain frpm buying into the Ponzi. Really would like to see someone sending "hot" information from these banks to wikileaks or why not zerohedge. Would be very healthy for the world to know the real truth about the manipulation we can see is going on. This is Albania on a globl scale and all we can do is to observe and wait for the inevitable.