That Was Close!

A new Fed paper analyzes the striking differences between mortgage-market liquidity – or the dramatic lack thereof – in the great financial crisis of 2008 and the pandemic crisis of March, 2020.  Providing often unique insights into market strain over the last two weeks of that month, the paper concludes that market resilience in this last near systemic cataclysm was due to better underwriting ahead of the 2020 collapse and – more significantly – far larger and faster federal interventions that quickly stabilized the agency market.

There was significant stress in mortgage banks exposed to TBA-hedge margin calls and among mREITs, with these strains only made manageable thanks to the Fed’s overall market support and the small size of the non-agency market in 2020 versus 2008.  The paper draws no conclusions about the next stress scenario, but its clear inference is that bailout is going to be the necessary order of the day absent more liquidity resilience at nonbank companies and mREITs.