Mortgage Liquidity Squeeze Flagged as Risk to Powell, Mnuchin

U.S. financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market.

Behind the concern aired recently at the Financial Stability Oversight Council headed by Secretary Mnuchin: The rapid growth of so-called shadow banks in the origination and servicing of home loans, especially riskier ones.

“There is a real weakness here,” said University of California, Berkeley professor Nancy Wallace, who co-authored a 2018 paper entitled ‘Liquidity Crises in the Mortgage Market’ with a fellow academic and ...