As of yesterday, lenders were charging an average of 7.34 percent
for prime, 30-year, fixed-rate jumbo loans, according to financial
publisher HSH Associates. That was up from an average of 7.09 percent
last week.It was also 0.75 percentage points more than the 6.59
percent they were charging for conforming loans. In mid-July, the
difference between the two types of loans was 0.20 percentage points.
If you think this is only a liquidity event, there is of course a profit opportunity. Note that the 10-year T-Bond rate has been falling. I am more inclined to think we are returning to a more reasonable spread between mortgages and Treasuries; let’s hope the transition is a relatively smooth one. If trading volume is low, traders may fear the other trader knows something he doesn’t ("no-trade" theorems are one source of Robin Hanson’s theorems on disagreement between persons), and we’re not yet in a new regime where such concerns are shrugged off or attributed to mere churning. Since regular trading is part of what brings expectations to such a new regime, the adjustment doesn’t generally occur right away (even when prices are flexible) and the ride can be a rocky one indeed.
Here is the cited article.
These things are rarely smooth.
Removing arbs this size requires the patient application of $billions at high leverage. Anyone
in that business has been clubbed like a baby seal for the past two months, to the point the ECB
and Fed have had to keep the banking system afloat for the past two days as the money markets
failed to clear. We’ll get to sorting these dislocations out once we figure out who’s left to do
it. Right now, anyone trying to fix someone else’s liquidity/solvency problem is just taking it on for
themselves.
I dont think this is just a liquidity event. I think we are looking at a credit event that is causing the liquidity crisis, where entities can’t pay what they owe.
We are in a regime change situation, the black swan if you will, where what was normal just a few days ago is considered to be based on flawed logic.
My Prediction: this is going to cost the U.S. taxpayer trillions. Probably like $2-3T, with a high of 4.5T. It will be sold as a bailout of homeowners, but somehow most of the benefits will go to investment banks and their investors. Individual homeowners will still be left with the bankruptcys and foreclosures, but the owners of the debts will be made far more whole then they would by just selling their now worth much less assets in the open market.
The fed is injecting liquidity again as we speak, an unprecidented move. As the home price bubble bursts – it is as I write these words – there is nobody short these assets. They are not futures markets. This is wealth that is being destroyed, just nobody knows it yet.
lol.
I know my mind is in the gutter. But this struck me as hilarious when listening to NPR news today.
Reporting on the three liquidity injections we saw today, the news-reader coldly stated, “The Fed went into ATM mode today.”
Classic. Too bad I cannot record such things.
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