#QM

As financial regulators fret about risk migration to nonbank financial intermediaries, a new race to the sunny side of the regulatory street is already underway.  As detailed in a comprehensive Bloomberg article, insurance companies are increasingly investing in high-risk whole residential-mortgage loans, doing so either with no capacity to service them unless they rely on parent-company private-equity firms to do so somehow.  What could go wrong?

This transaction is redolent – indeed, it’s a repeat – of how nonbanks barged into mortgage finance before the great financial crisis without a clue about the real risks they ran.  Well, I recall Bear Stearns’ big bet on mortgages placed without any concomitant servicing capacity because, as they said at the time, mortgages never go to foreclosure.  Speculative house-price increases led them to this sanguine conclusion because there hadn’t been many foreclosures for a couple of years, but neither Bear Stearns’ mortgage portfolio nor the firm is here today to ruminate over hard lessons learned in the 1980s.

Bear Stearns’ failure quickly became a systemic threat, with wider damage delayed until the 2008 crash thanks only to the first of the Fed’s high-cost subsidized mergers that bred moral hazard that fired speculation up to a still more frenzied height until Lehman Brothers failed.

As before the great financial crisis, insurance companies are investing in high-risk mortgages because yield-chasing and capital arbitrage rewards them, at least for now.  The whole mortgage loans insurance companies are buying carry wide spreads over RMBS is only …