I trade mortgages for a large money manager. In the current market environment of zero liquidity, I am unwilling to purchase any new mortgages. Even AAA-rated prime mortgages. The problem is, I am marked to market and I think there is more delevering to go. The primary dealers' balance sheets are all saturated, so their bid on any mortgage product is ugly.
This illiquidity in the secondary market creates a problem with mom and pop of main street getting a mortgage. You can say this is a Wall St. problem, not a main street problem, but if you connect the dots it will soon become a main street problem. Mortgage credit in this country is drying up rapidly. Wells Fargo raised their rates on prime jumbo mortgage loans because they have no place to off load the loan. In other words, it competes for room on their balance sheet with other investments, whereas before it would be securitized and sold. As a result, mortgage credit is extremely tight. This is a problem for Bernanke and the Fed. They have have left short term interest rates unchanged, but credit conditions have tightened dramatically. This will make its way into the "real" economy. I would argue that easing wouldn't be more accomodative, but rather just offsetting impact of a broken market. I know they don't want to be seen as bailing out Wall Street, hedge funds, or prop desks, but it may be something they will have to live with to avoid an anemic "real" economy. I promise you that denial of credit to prime borrowers will hurt the consumer (2/3 of GDP) and cause a further collapse of an already precarious residential real estate market.
