The GRYNING | Essays: Boom!
The following is a continuation of The GRYNING | Essays - they are designed to give you a better understanding of the current state of affairs, allowing you to make informed decisions on how best to protect your wealth, before pointing you towards where the best opportunities lie. Pick up your 2022 copy below:
Boom! - March 19, 2023.
From July through December 2021, the average fixed rate for a 30-year mortgage hovered around 3%. Most home owners locked in this gift from the Federal Reserve. The low rates triggered manic building and bubble pricing, as they always do—but, unlike the bubble of the 2000s, 92% of new mortgages were fixed rate: rising interest rates became more threatening to lenders than to borrowers.
The Fed began hiking rates twelve months ago, and the question became: on which balance sheets did the massive interest rate liability lie? Not those of the issuers: ever more mortgages were issued by non-bank lenders who accessed capital through 15-day facilities from money-center banks. Terms were so short because mortgages were flipped immediately to Fannie Mae and the other quasi-government agencies. The agencies did not bear the risk because they securitized the mortgages and issued MBSs to banks and other investors. Large, money-center banks bought MBSs but tend to have a significant amount of variable interest income from credit cards, business loans, and loans to other institutions. They also aggressively hedge rate risk and tend to buy the highest securitization tranches with the shortest maturities. Who was left with the interest rate exposure, either directly or as counter-parties to hedging transactions?
Insurance companies, pension funds, shadow banks, and small banks.