Why 2 housing economy 'babies' are being thrown out with the bathwater

  • The Federal Reserve is still deeply engaged in trying to run-proof the banking system.
  • The Fed says ABS-MBS securities are “illiquid” and require many times more capital to support them on a bank balance sheet than a Fannie MBS. Hence, today’s very cramped supply of jumbos.
  • Loan servicing rights also have substantial market value, but loan servicing contracts are not liquid. They suddenly became expensive for a big bank to hold.

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In the 1930s, everybody knew what a “bank run” was. Grown-ups lined up around the block, hoping to get in the bank to take their money out before the bank closed. Today known as a “retail run,” this was stopped in the ’30s by deposit insurance — really a government guarantee that your money is safe, and there’s no reason to run to get it.