Liquidity is waning in markets for residential mortgages and related securities, and regulators and policymakers need to address this issue before it turns into a crisis, according to a report from Kroll Bond Rating Agency.
Kroll identified a number of factors that could be contributing to a serious liquidity crisis. Among them are regulations on credit creation, increases in banks' capital and liquidity requirements, and the deflationary effect that low interest rates have had.
"Indeed, without relief in terms of higher interest rates and meaningful regulatory reform, smaller nonbank seller/servicers operating in the U.S. mortgage market could fail," Kroll analysts wrote in the report released Wednesday.
The result then could be that these entities' creditors may abandon the leftover mortgage servicing portfolios and simply obtain any available collateral before walking away in light of the dwindling profits from servicing. In such a situation, the government agencies that guarantee affected mortgages would be forced to subsidize the servicing of these portfolios, which Kroll noted has only occurred in the 1980s and 1930s.
"Regulators and policymakers need to take notice of the dwindling liquidity in and capital available to support the markets…and consider what it says about the economic model for lending, loan servicing and securities dealing in the current regulatory environment," the analysts wrote. "The cumulative effect of monetary policy actions, and prudential and consumer regulations, may be creating the circumstances for a future liquidity crisis."
