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

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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