Housing market sees worrying sign as mortgage lenders fail

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Some independent mortgage lenders, feeling the brunt of higher lending rates, are filing for bankruptcy and in some cases have already laid off hundreds of employees in what has been described as the housing market’s worst state since the bubble burst in 2008.

Some lenders have already scaled down their size or closed permanently, Bloomberg reported, such as First Guaranty Mortgage, a company majority-owned by fixed income giant Pacific Investment Management. After making loans that had fallen in value that year, First Guaranty filed for bankruptcy in June, resulting in 471 of its more than 600 employees losing their jobs.

Citing data from LendingPatterns.com, Bloomberg reported that non-bank lenders accounted for two-thirds of refinance firms in 2021 — up from about a third in 2004. Banks’ market share has fallen from half to about a third since 2016, according to News and data provider Inside Mortgage Finance.

Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, said news week that there are “some similarities and stark differences” between what happened 15 years ago and what’s happening today – alluding to the fact that mortgage lending has fallen by 50 percent.

“What happened in the great financial crisis of 2008, excess lending, imploded the mortgage lending industry — which made these really risky loans,” Wachter said. “It was kind of a supply shock.”

While mortgage loans then defaulted, now it’s not “risky lending practices” but a drop in demand, she said, especially for refinanced mortgages because borrowers have no incentive to refinance if rates double rather than because of the Fed’s rate hike to sink.

“It’s kind of the opposite of what happened in 2007,” she said, saying prices fell back then because loans couldn’t be repaid and borrowers were flooded. Now prices are not falling, but rising.

Construction workers stand on scaffolding around a new apartment block in Los Angeles August 16. The National Association of Realtors’ chief economist Lawrence Yun told Newsweek that not only do consumers have fewer construction workers and “significant” cuts in the credit industry, they find plenty of rebates to take advantage of in this economy.
FREDERIC J. BROWN/AFP via Getty Images

“Right now, consumers are really keeping the economy going, and they’re doing that because they have a sizable real estate fortune to draw from,” Wachter said, adding that first-time buyers are “on the sidelines” due to 20 percent annual housing cost increases and cannot qualify for credit.

This was announced by the chief economist of the National Association of Realtors, Lawrence Yun news week via email that “there is a housing recession in terms of fewer home sales, lower housing starts and declining mortgage lending, particularly the mortgage refinancing collapse.”

In addition to fewer construction workers and “significant” cuts in the credit industry, Yun said consumers wouldn’t find many rebates to take advantage of in this economy.

“The housing market is on solid foundations with imperceptible distress,” he said. “Homeowners are still seeing wealth gains. Let’s just hope that home price growth slows to a single-digit percentage of annual appreciation to give a prospective homebuyer’s income a better chance of catching up.

“With fewer sales, the level of multiple offerings is less intense. It’s still the case that 40 percent of homes are being sold at or above list price due to the ongoing housing shortage,” Yun said.

Wachter, the co-author of a book called The Great American Real Estate Bubble on the 2008 recession said if mortgage rates continue to rise significantly, there could be a “hard landing” economically. In addition, the Fed is likely to continue raising rates until inflation falls.

“It’s going to hit the mortgage markets even worse because housing becomes even less affordable,” she said. “We’re going to see that house prices aren’t just slowing down; we’ll see the housing markets fall… I don’t see a silver lining for the mortgage industry this coming period. The tide, the problems that have taken the industry into the abyss, are likely to get worse. Expect independent mortgage lenders to be even more challenged.”

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