Could the mortgage market be facing a liquidity crisis?


The mortgage market could be staring at a liquidity crisis in the very near future thanks in part to the Federal Reserve’s repeated reluctance to increase interest rates, Kroll Bond Rating Agency Senior Managing Director Christopher Whalen told CNBC on Wednesday.

Whalen, a frequent HousingWire contributor, told CNBC that the market is not in the same place as it was when the Fed first reduced the Federal Funds rate to zero, and said that the Fed has not kept up with the market’s changes over time.

And, according to Whalen, the Fed’s inaction combined with other market factors could lead to a liquidity crisis for the mortgage market.

From CNBC:

“Policymakers are not watching spreads,” said KBRA senior managing director Christopher Whalen. “There is a liquidity problem — this is a near-term concern.”

Regulation is up, rates are down and widening credit spreads suggest a lack of demand in the market on which mortgage lenders depend. Even as home sales surge to nearly a nine-year high, Whalen said a combination of unnatural monetary policy and restrictive regulations could critically wound the mortgage market, at a time when central bankers are left with few levers to pull in order to sidestep a crisis.

According to Whalen, the tenuous position of money flowing through the mortgage market could “grind home sales to a halt.”

Again from CNBC:

Liquidity for mortgage servicing rights has tightened, in part due to regulation limiting the number of players in the market, KBRA notes.

Similarly, secondary market liquidity for whole loans, mortgage securities and U.S. bonds is tightening. At a time when it’s increasingly difficult for a mortgage servicer to turn a profit, Whalen said the next leg of the tightening scenario may mean higher fees for homebuyers.

Leave a Reply