Margin calls on hedges used by lenders to protect themselves from rate swings threaten to destabilize the mortgage market after the Federal Reserve began purchasing billions of dollars of bonds backed by home loans, the Mortgage Bankers Association said.
While the MBA supports the Fed’s purchases, aimed at preventing a credit crunch by creating demand for bonds, they’re creating an “urgent concern” about hedges, MBA CEO Robert Broeksmit said in the letter Sunday night to the Securities and Exchange Commission and the Financial Industry Regulatory Authority, known as FINRA.
Lenders need “flexibility,” he said, in meeting margin calls created by the hedges – financial instruments that protect companies from rate volatility. The transactions happened in the so-called TBA market, which stands for “to be announced.” In a TBA trade, the seller of a mortgage bond agrees on a price and the types of loans that will be in the security but doesn’t specify which securities will be delivered to the buyer on settlement day.
“MBA urgently requests that FINRA and the SEC issue guidance to the nation’s broker-dealers, making clear that margin calls on mortgage lenders’ TBA hedge positions should not be escalated to destabilizing levels,” Broeksmit said. “Absent such guidance and an immediate shift in broker-dealer practices, the U.S. housing market is in danger of large-scale disruption.”
The Fed’s pledge to buy “unlimited” amounts of Treasuries and MBS to stabilize the credit markets are a boon, in the long term, Broeksmit said. But, lenders need help in the short term.
“While lenders can expect to recognize gains on their pipelines, they will also recognize losses on short TBA positions used for hedging purposes,” Broeksmit said.
“Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week,” he said. “For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.”
The SEC and FINRA did not respond to HousingWire’s request for comment.