by Michael Maharrey on SchiffGold.com:
The tanking housing market is starting to put a strain on the mortgage industry with some lenders already going out of business. Analysts project the wave of failures coming down the pike could be the worst since the housing bubble burst and triggered the Great Recession.
Home sales plunged again in July, falling 5.9% month-on-month. It was the sixth straight month of monthly declines. Year on year, home sales have plunged 20%. According to the National Association of Realtors, we are now in a “housing recession.”
The seasonally adjusted annual rate of sales in July came in just a hair above the June 2020 rate – in the middle of the COVID lockdowns. Beyond the lockdown months of April-June 2020, it was the lowest sales rate since 2014.
The average 30-year mortgage rate has exploded to 6.9% making already expensive homes even more unaffordable for the average buyer. As a result, mortgage application volume has plunged by more than 50% this year.
We’re already starting to see this housing recession trickle into the mortgage industry.
After ’08, many big banks pulled back from mortgage lending. As a result, independent lenders now control a larger market share. These smaller firms enjoy less capitalization than the corporate banks, and they are already feeling the impact of the meltdown in the housing market. As one industry analyst put it, “When the mortgage market tanks they are in trouble.”
According to Bloomberg, analysts “expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers.”
A number of mortgage companies have already stopped operating or significantly scaled down operations. Companies that specialize in riskier lending are feeling the pain first.
First Guaranty filed for bankruptcy in June. According to court documents, the company failed after making loans earlier this year that “dropped in value.” According to Bloomberg, the company was holding onto those loans until it had enough to bundle into bonds and sell to investors. In the meantime, it was temporarily funding them with a line of credit. When interest rates began to climb and lending volume plunged, the company couldn’t generate enough loans to bundle. With financing drying up, the company was forced to declare bankruptcy.
First Guaranty employed 600 people prior to its bankruptcy. It has since let 471 workers go.
It’s not just smaller companies feeling the bite of the housing recession. Wells Fargo ranks as the biggest bank in the US mortgage business. It recently announced plans to shrink its home loan empire.
According to Bloomberg, the rapid rise in mortgage rates has “beaten down” the value of home loans made just months ago.
A mortgage made in January and not eligible for government backing could have traded in early August somewhere around 85 cents on the dollar. Lenders usually try to make loans worth somewhere around 102 cents to cover their upfront costs. For a lender whose loans dropped to 85 cents, the losses can be debilitating, even if they aren’t realized yet.”
Things will only get worse.
With the Federal Reserve pushing its base rate up another 75 basis points in July, and most expecting at least another .5% hike in September, you can expect mortgage rates to continue their rapid upward climb. As Reuters noted, the housing market is “the sector most sensitive to interest rates,” and it’s losing speed.
This is just one of the many economic distortions caused by the government and the Federal Reserve’s response to the COVID-19 pandemic.
The Fed blew up a housing bubble when it artificially suppressed interest rates and bought billions of dollars in mortgage-backed securities. Now the central bank has pricked the bubble by pushing rates up.
What the Fed giveth, the Fed taketh away.
Mortgage rates began to fall in late 2018 as the economy tanked and the Federal Reserve ended its post-2008 rate hike cycle. Rates continued to fall as the Fed pivoted back to quantitative easing, and then they dropped through the floor with rate cuts and QE infinity in response to the coronavirus. The big spike in mortgage rates we’re seeing today started as the Fed began talking up monetary tightening to tackle raging inflation.
We expect the housing bubble to continue to deflate as we move through 2022. Just how fast the air comes out and the impact on the broader economy remains to be seen.
Originally posted by Michael Maharrey on SchiffGold.com.