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More complicated is that the shorts on MBS which mortgage servicers use to hedge their exposure to non performing loans are also losing money. As Fed buys more
by ivalm 7y ago
More complicated is that the shorts on MBS which mortgage servicers use to hedge their exposure to non performing loans are also losing money. As Fed buys more and more MBS the loan services can no longer recoup money via their hedge, can’t get payment out of borrowers, and often can’t even resell the loan since lots of them are recently refinanced and now with forebarence have not made their first payment.
- peterwoerner 7y agoThank you for explaining that simply to me.
- alexpetralia 7y agoThey can't sell their MBS to the Fed? Who exactly is the Fed buying from then?
- ivalm 7y agoOwner and servicer are different companies. Servicer does not own the loan, they simply paid an upfront cost to have the right to collect payments from homeowners (from which they take a cut). So the owner can sell their MBS to Fed to reduce uncertainty on their balance sheet, but servicer is just stuck servicing the loan — they already paid the upfront cost for the right to service the loan. That’s why they hedge by shorting MBS.