[vkou]

I have read this article five times, and I have come to the conclusion that I'm either an idiot, or there doesn't seem to be any impropriety on the side of the Fed, nor the mortgage holders.

Am I wrong?

This seems to be a perfectly reasonable use of derivatives - as a mitigation of short-term risk... That happened to fall apart, because the Fed stepped in, as an 'irrational' market actor.

[jimhefferon]

I thought the article's point is that ordinarily lenders only hedge for short periods of time, but that because of the virus they are not closing the loans and the hedges are hanging out there. Am I wrong?

[vkou]

I don't think that's the problem. It sounds like the problem is that they are holding both a loan, and a short, which is supposed to mitigate their exposure to market swings until they sell the loan.

It's like an oil company shorting oil, to hedge the risk of the market moving against them, before they can sell their inventory.

The problem is that the fed is now buying every asset under the sun, and instead of their loan and their short being inversely correlated, they are now uncorrelated, which is killing them.

The equivalent would be the oil company's oil dropping in price... While the price of oil increases, this killing their short. This doesn't really happen in properly functioning markets, but markets currently have huge liquidity problems.

At least, that's what it sounds like.

[getlawgdon]

They hedged poorly. They bracketed their position using risk they couldn't afford to take. Every market is unpredictable, and margin calls for poor risk taking is the result.