Lesson Plan For The Future

Understanding the Housing Finance System:

Mortgage Interest Rates will continue to rise…if I had to bet on it.

No Bid

What if there is a sale of Mortgage Backed Securities (MBS)…and nobody bid?

It happened last week.

I asked a reliable source:

What is the result of no one bidding on these Securities (that fund home ownership)…What happens to those mortgage backed securities if no one bids on them?

and how long does it usually take for there to be repercussions on a “No Bid?

“As usual there’s no simple answer. We’ve never been here before due to the political expansion of the Fed’s work, QE/QT. (Quantitative Easing/Quantitative Tightening).

If there’s no bid, non-bank financial institutions, the majority of loan originations, will stop making these loans and most likely go out of business.

This will be made worse if the Fed starts selling MBS on its balance sheet rather than just letting them run off. If they sell, they’ll need to sell at a significant discount to offer enough yield to attract investors.”

“The Fed can sell securities at a loss but not have a loss! The sales count as revenue for the Treasury.

The basic problem is that MBS duration is increasing. So, who wants investments that last forever with yields below market!”

My takeaway from this?

Interest rates will continue to rise, recession is around the corner.