Mortgage Backed Securities go “no-bid”

Most of you will recognize MBS as the drivers for the great recession.

They are basically a bunch of mortgages bundled into a product which investors buy. When enough of the mortgages in the MBS go unpaid, it becomes a toxic asset. These toxic assets were sold for less than a penny on the dollar during tGR.

Well…it seems that MBSs no longer have any interest to investors.

Buyers have signaled that they’re no longer worth the investment at this yield. If investors don’t want the MBSs, banks have to hold individual mortgages longer. Banks don’t want to hold mortgages, so the lack of investors buying them will cause banks to be much more careful with their loans. If banks make getting approval difficult, liquidity dries up…then housing demand dries up…then housing prices fall, which is most of our on-paper money.

Here’s an article on it from Zero Hedge:
When your car hits a telephone pole, no problem. Then, after a slight lag, trouble comes when you hit the inside of your car. Same thing in football: helmet on helmet is all-okay... until your brain hits the inside of your skull.

The same physics govern housing collisions with mortgages. At the new year mortgages were still three-ish. In February, four. At the end of March, five. May, five-and-a-half. Historically, a two-percentage-point rise from cyclical trough has iced housing, the freeze underway a month ago. Now up by three points, and double January.

The pause in housing between the first collision and second is elongated because of human nature. Someone desperate to buy a house is still desperate, and modestly relieved to buy even at a higher price and rate so long as not forced into an unlimited auction. Now it’s time for Wile E. Coyote in his Acme sneakers, running off into thin air and all okay until he looks down.

Looking down... MBS are such a weird market that other markets have not processed what is happening. Stocks are down 2% today, but would be down a hell of a lot more if considering what a full-stop to housing will mean.

Another marker of MBS distress: the 10-year T-note had held 3.00% since April, the important top in 2012 and 2018. Trading 3.05% yesterday, now 3.20% -- retail mortgages jumped triple that amount. The 10s/mortgages spread today is almost 300bps and double the 10s’ yield. Inconceivable. The Fed telltale 2-year T-note had held 2.70% since April, 2.85% yesterday, today 3.05% adding only one more .25% hike to the 2-cast, which is not enough to explain MBS overnight.

Continued on Zero Hedge