Morning Report: Margin relief, please

Vital Statistics:


Last Change
S&P futures 2545 20.4
Oil (WTI) 20.14 -1.39
10 year government bond yield 0.65%
30 year fixed rate mortgage 3.44%


Stocks are higher this morning as the government extended social distancing for another two weeks. Bonds and MBS are flattish.


Margin calls have been driving the independent mortgage bankers crazy over the past month. The Fed’s dramatic actions in the mortgage backed securities market may have helped liquidity, but it has pushed the IMBs to the wall. The MBA has been in discussions with the Fed and policy makers to make them aware of what is happening.

“While lenders can expect to recognize gains on their pipelines, they will also recognize losses on short TBA positions used for hedging purposes,” MBA said. “These pipeline gains will be recognized over a period of weeks, but the sharp movement in lenders’ hedge positions typically entails daily adjustments and margin calls from their broker-dealer counterparties. Because of these dramatic price changes, broker-dealers’ margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the past week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.”

For what its worth, the Fed’s MBS purchase guidance for today. It is “only” $40 billion versus the $50 billion last week. I see a lot of “tentative” notes, so hopefully they will let them breathe a little. Unfortunately, the April 2.5s are 105 bid this morning, so it isn’t a good start. The regulators need to figure something out: either tell FICC to call off the dogs, or perhaps let independent broker dealers assign their short TBAs to Fannie.


Fed MBS purchases


There is talk that Ginnie Mae is going to put out an APM that will allow GNMA to cover advances for servicers who get hit by a wave of DQs. The government has to do something, because non-bank servicers simply don’t have the liquidity to handle it.


Economists forecast that the Coronovirus will cause a record recession and a record expansion all in the same year. Wells Fargo predicts a 15% contraction in Q2, a 6% contraction in Q3 and a 4% expansion in Q4. They are calling for the 30 year fixed rate mortgage to fall to 2.9%.


Zillow is working to cancel all of its existing contracts to buy homes under its iBuyer program. I guess Zillow’s offers are contingent after all, and you have to wonder if paying 7.5% and up is worth it.


New Jersey has instituted a 90 day mortgage holiday for those who have been impacted by Coronavirus. No late fees, no credit hit. Note that the mortgage forbearance plans that have been advertised in the press involve adding the missed payments to the end of the loan. That isn’t necessarily the case. Check with your bank.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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