MBS Market Warning: On Any Given Day, The MBS Market Is 6 Hours Away From Total Collapse
The volatility of the MBS market is a topic that absolute no one is talking about. Well that is outside the gin-soaked Wall Street cocktail parties.
Many outside the industry mistakenly believe that Mortgage-Backed Securities market went away after the 2008 crash. People who believe this are definitely wrong.
It’s alive. It also kicking and screaming at a pace of about $300 billion per day in US transactions. Indeed, there’s $11 trillion in US MBS securities outstanding at any given time. Mortgage bond trading is 1/3 of the daily business of the entire nearly $1 trillion per day bond volume.
We’ve all seen the headlines about plummeting mortgage originations. However, what we’re not hearing is the mounting problem on the back side. This is a secret that the guys on Wall Street don’t want you to know.
Put bluntly, MBS is considered the ‘business end of the broom’ to the mortgage industry. Prior to 2008, the MBS market’s insatiable appetite drove some very bad behaviors. Behaviors that led to the collapse of the stock market and financial crisis of 2008.
Wall Street firms group MBS Loans into “pools.”
They then get chewed up and spit out or ‘traunched’ in banker jargon by vintage and quality. Alarmingly, 42% of the US government-backed paper is coming from pools that are less than a year old. So what happens now with loan originations dropping off? Where are the new loans to feed the beast?
CNBC also reported another alarming figure: only 452,000 outstanding loans could benefit from a refinance… meaning only that many loans are still out there with note rates of well over 6%. Based on simple math, that’s only $135.6 billion in high yielding paper. This is less than 6 hours worth of trading. Is it time to panic yet?