This Is Why the Fed Should Stay the Hell Out of the Stock Market

  • The Mortgage Bankers Association warned that the Federal Reserve’s purchase of mortgage-backed securities has disrupted the market.
  • As a result, lenders may be unable to meet hedge calls from brokers within one or two days.
  • The warning casts an ominous shadow on predictions that the Fed could dive into the stock market next.

The Mortgage Bankers Association has told the Federal Reserve to keep its mitts off mortgage bonds. And if there’s anything this fiasco proves, it’s that the U.S. central bank needs to stay the hell away from the stock market too.

In a somber letter to regulators, the MBA warned that the Federal Reserve has put the U.S. housing market “in danger of large-scale disruption.”

Why? Because the Fed purchased $183 billion in mortgage-backed securities last week. The MBA argues that the move caused an explosion in margin calls on mortgage lenders. Consequently, lenders are at risk of running out of working capital.

At an unprecedented time when the Fed may begin passively purchasing stocks, this warning outlines the significant risks of intervention. Instead of helping an increasingly serious situation, the Fed’s commitment to “infinite” aid may end up making things infinitely worse.

The Federal Reserve Threatens Survival Of Mortgage Lenders

The Fed’s mortgage bond fiasco doesn’t bode well for potential future plans to intervene in the stock market. | Source: Tyler Olson/Shutterstock.com

The Federal Reserve is only trying to help, it would claim. But the MBA has written in no uncertain terms that the Fed’s unprecedented purchase of mortgage-backed securities has endangered lenders.

Prior to the Fed’s intervention, lenders relied on a hedge position. It would pay out in cases where the current market rate is higher than the mortgage rate they originally signed with customers. Hence, it protects them against a rise in the cost of their borrowing.

The MBA alleges that the Fed has effectively ruined this:

The dramatic price…

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