Bailout Request by US Mortgage Lenders – Due Huge Basis Risk?


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The Mortgage Bankers Association is asking the Fed for a bail out, claiming that the Fed’s recent buying spree in MBS has led to margin calls on the short hedges against MBS these lenders entered to protect themselves from price declines in the period before they can package the loans to Fannie Mae and Freddie Mac.

This does not make intuitive sense to me unless there is a significant basis risk between the long position (newly originated loans) and the short hedge position (MBS), as the Fed buying should push up prices on the long and the short to a roughly offsetting degree.

Does anyone have practical insight to the degree of basis risk mortgage bankers assume in these sorts of hedges? How long would it take to transfer the loans to Freddie and Fannie in normal market conditions?

If basis risk is not large enough to explain the purported damage by the Fed’s recent actions, is there a possibility that the mortgage banks entered short positions that were not hedges?