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“The market is priced as if it might melt down, yet real cash investors absolutely don’t expect that to happen,”

What accounts for this difference in perception? Is it purely the fear that “it might get worse before it gets better, and even if it’s almost guaranteed to get better in the long term it would be a career-limiting move to buy anything that might fall further by next quarter”, or is there more to it?

Andrew Clavell has a post about how the valuation of CRE funds sometimes mimics a barrier option, and that this drives down their valuation significantly.

I don’t fully follow his argument, but if he’s right, would this account for the difference in perception between what derivative pricing says CRE is worth and what property developers think CRE is worth?

While the purchases are only temporary — the cash must be returned by Monday — one wonders how long before the Fed grants itself the power to buy MBS permanently. Either way, the Fed’s response shows that it is worried about the growing mortgage crises and willing to do anything to buy its way out of it. Unfortunately, by buying up MBS and propping up the market the Fed will only cause more harm than it already has.