All Things in Moderation

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

The Fed is allowing the temporary change to the Supplemental Liquidity Ratio to expire at the end of the month. Part of what has been driving rates higher has been banks getting ahead of this expected change. The punch line is that banks were holding a lot more Treasuries and mortgage backed securities than normal and now that will reverse. I am not sure where we are in this unwinding process, but it sounds like it has to end by the March 31.

So far we haven’t seen more guidance out of the GSEs regarding the investment property cap. Aggregators have been adding big hits to second and investment properties to discourage sellers. The most likely result of this will probably encourage the re-launch of the private label securitization market, particularly in non-guaranteed QM loans, which are loans that conform with QM, but are not guaranteed by the government. Re-launching this market will probably be an easier lift than the standard non-QM loans simply because there is a lot of data regarding prepays and defaults.

I wrote about this issue a few years ago, and as far as I can tell, not much has changed since then. The big thing people don’t realize is that there are a lot of issues the buy-side needs resolved in order to bid this paper. It isn’t as simple as the mortgage industry thinks it is. A lot of stuff needs to be ironed out at the SIFMA level regarding the behavior of issuers and servicers. Given there is a need, we will probably see it happen, but this market isn’t about re-materialize overnight.

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