Mortgages are getting margin called in the shadow banking system. Repo market.

[StonksStonksStonks]

This was co-authored by some federal reserve board members 2 years ago https://www.brookings.edu/wp-content/uploads/2018/03/KimEtAl_Text.pdf

III.C. The Warehouse-Lending Process shows the two stages of the warehouse-lending process. In the initial stage, shown on the left side, the mortgage borrower is approved for a mortgage from the nonbank originator, who funds the mortgage using a draw from a line of credit provided by a warehouse lender. Typically, the warehouse lender will only fund about 95 percent of the mortgage balance, so that the nonbank originator has some skin in the game for each loan. The collateral on the loan is the mortgage, and the nonbank in turn transfers the mortgage to the warehouse lender to collateralize the draw on its line of credit. Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, mortgage-collateralized warehouse lending has been eligible for accounting and legal treatment as repurchase agreements (repos).

Next, turn to page 16: III.D. Vulnerabilities of Warehouse Funding, to keep it simple its the equavlant to adding stop loss to every warehouse line of credit (which are used to fund mortgages). Since the margin call is on the loan for the mortgage instead of the mortgage itself, we don't see forclosures yet, but instead the margin call money is funded by the repo. Shawdow banks take the margin call. They pay the call via repo loan and pay that back via bonds, hence why the fed is buying those, junk bonds to be specific

Ginnie Mae servicers can only obtain unsecured financing, such as unsecured corporate bonds, to cover their advances. The rates on this financing are high, especially because many nonbanks have highyield credit ratings.

tl;dr most high risk mortgages(over 50% of total mortgages) that a bank wouldn't lend, was lent by shadow banks via a link of credit from the banks. Banks have tight stop losses set on these and have been issuing margin calls on tons of them.

[jackg]

Is a fall in property prices that much of a detriment at this stage? It's annoying markets get done like this but it's better than what we saw in 2006...

I don't think it's unreasonable to think the riskier loans are moved to a different fund (I'm assuming it's a fund and not an individual mortgagee) they've probanly called for that themselves and traditional bank accounts don't make much in interest...

[StonksStonksStonks]

Is a fall in property prices that much of a detriment at this stage? It's annoying markets get done like this but it's better than what we saw in 2006...

I dont think its much different from 2006. It seems the gov imposed regulation ristricting bank mortgage lending after 2008. As a result the banks sidestep the reguluation and now lend via a shell comapny "non bank"


Bank lends wearhouse line of credit to shell company ----> shell company lends mortgages to whoever they want.
Note that the non-bank(shell) takes a risk of 5% of the mortgage, so they only need to make sure the barrower is good enough to repay the first 18 months of the mortgage.

[exstasie]

Next, turn to page 16: III.D. Vulnerabilities of Warehouse Funding, to keep it simple its the equavlant to adding stop loss to every warehouse line of credit (which are used to fund mortgages). Since the margin call is on the loan for the mortgage instead of the mortgage itself, we don't see forclosures yet, but instead the margin call money is funded by the repo. Shawdow banks take the margin call. They pay the call via repo loan and pay that back via bonds, hence why the fed is buying those, junk bonds to be specific

Ginnie Mae servicers can only obtain unsecured financing, such as unsecured corporate bonds, to cover their advances. The rates on this financing are high, especially because many nonbanks have highyield credit ratings.

tl;dr most high risk mortgages(over 50% of total mortgages) that a bank wouldn't lend, was lent by shadow banks via a link of credit from the banks. Banks have tight stop losses set on these and have been issuing margin calls on tons of them.

You're saying the Fed is essentially now backing these high risk mortgages, collateralized by all the junk bonds they're buying?

Interesting theory and to my mind it makes sense, but that was written 2 years ago. Do you have any source indicating this is happening now?

[StonksStonksStonks]

You're saying the Fed is essentially now backing these high risk mortgages, collateralized by all the junk bonds they're buying?

Interesting theory and to my mind it makes sense, but that was written 2 years ago. Do you have any source indicating this is happening now?

Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, mortgage-collateralized warehouse lending has been eligible for accounting and legal treatment as repurchase agreements (repos).

^ this law has not changed. The fact that a report was written on it 2 years ago obiviously would not have changed it. Additionally if any changes were made to the non-bank mortgage system would cause credit for housing to dry up and home value to drop. So we can rest assured that nothing has changed within the past 2 years.

Its best thought as these NBO(non-bank organization) act as a shell company for the banks to bypass the restrictions put forth in 2008. That is, in fact, how we got housing prices back to above 2008 levels.

[StonksStonksStonks]

btw this pretains to Bitcoin because.... in 2008 when mortgages collapsed it means the banks took the loss. Now, in 2020 its set up so the federal reserve takes the loss. You know the federal reserve wont go bankrupt, they'll just print more money. That is why they are trying with every ounce of power to pump the markets.

This might lead to the collapse of the dollar if real estate collapses this time

[exstasie]

You're saying the Fed is essentially now backing these high risk mortgages, collateralized by all the junk bonds they're buying?

Interesting theory and to my mind it makes sense, but that was written 2 years ago. Do you have any source indicating this is happening now?

Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, mortgage-collateralized warehouse lending has been eligible for accounting and legal treatment as repurchase agreements (repos).

^ this law has not changed. The fact that a report was written on it 2 years ago obiviously would not have changed it. Additionally if any changes were made to the non-bank mortgage system would cause credit for housing to dry up and home value to drop. So we can rest assured that nothing has changed within the past 2 years.

Okay but you said there have been "tons" of these margin calls and that the Fed was picking up the tab. Is there any actual data to support that, or are you just speculating?

[StonksStonksStonks]

Okay but you said there have been "tons" of these margin calls and that the Fed was picking up the tab. Is there any actual data to support that, or are you just speculating?

we noticed huge surge in fed repo loans starting before the pandemic even started, september 2019. https://fred.stlouisfed.org/series/RPONTSYD
Nobody knows the reason why finanical institutions all of sudden need tons of repo loans. Yes, my post is speculation in trying to find the reason for it.

[FanEagle]

This reminds me of 2008 all over again. When banks realize they could make money from something, they do not care about the risks involved with it at all, you know why? Because, they know there is two possibilities that will happen. Either they are going to make a ton of profit from something that is hugely risky, or they will just get a bail out from the government. There is no scenario where they will go bankrupt and they know this which causes them to act a lot more riskier.

As long as we do not punish banks that does risky stuff and get bankrupted, we are not going to see anything change. Let's say you go out and steal money from a shop, and if you get caught you are set free and if you do not you have the money, there are so many people who will continue to steal in that case since they know even if caught they will be set free. This is what going on with the banks.

[abhiseshakana]

As long as we do not punish banks that does risky stuff and get bankrupted, we are not going to see anything change. Let's say you go out and steal money from a shop, and if you get caught you are set free and if you do not you have the money, there are so many people who will continue to steal in that case since they know even if caught they will be set free. This is what going on with the banks.

Since the withdrawal of the Breton Woods system to the subprime mortgage crisis is proof that when the US broke away from gold then the subprime mortgage incident in 2008 overshadowed the dollar. Even for currencies as strong as dollars, even if printed without an underlying, it turns out to be very fragile. All are still easily disguised by the US because the amount of physical dollars circulating outside the US is greater. The US remains aware that the most stable system is if the value of the dollar printed in accordance with the gold reserves that the US has with the aim that the dollar is not overvalued and a similar crisis in 2008 will not be repeated.

We have never really punished banks for the practice of interest in business and the practice of fractional reserve banking which is actually a speculative practice of taking risks for the benefit of banks with customer money. Banks are only meant for the rich and the government protects this practice by protecting banks and making banks the economic pulse. An effective way to punish a bank is to act in unison by a customer to withdraw cash from a savings account. An alternative to our security can save in bitcoin or put in a save deposit box. This will make the government and many people aware if banks are a problem for the economy, not a solution.