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

Asset-backed securities and loan servicing contracts aren't liquid
  • 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.

Learn the New Luxury Playbook at Luxury Connect | October 18-19 at the Beverly Hills Hotel

Today, Federal Reserve chair Janet Yellen held a press conference, indicating that the Fed would proceed "cautiously" regarding interest rates. These aren't mortgage interest rates, but the overnight cost of money. However, what happens to the Fed's interest rate has repercussions for housing. The Fed is still deeply engaged in trying to run-proof the banking system. Dodd-Frank gave the Fed essentially unlimited authority to re-regulate banks after the credit bubble blew in 2008, but the Fed has wisely taken its time. (Better to screw down risk one turn at a time than all at once, give banks and markets time to adapt, and take time to evaluate the consequences of each new turn.) Data curated by FindTheCompany The first steps were obvious: Stop with the stupid stuff. Raise more capital by selling stock, so that you have more skin in the game and can afford to lose bigger strips of your hide before you need a bailout. Set maximum exposures to other institutions. Keep...