Financial markets are currently fragile. And no example illustrates this better than the multi-layered problems that plague the United States. mortgage market.
Mortgages for U.S. Consumers interest rate Probably the most direct translation of the Federal Reserve’s interest rate movements. More than 50 million Americans have a mortgage, and a significant portion of Americans’ net worth is tied to their primary home.
Let me briefly explain what happens when someone takes out a mortgage.Bank Or a mortgage lender (such as Rocket Mortgage) initiates a mortgage and receives a fee from the borrower. The lender sells the mortgage within his 30 days of closing. This frees up cash for your next loan. It is offered to entities that pool hundreds of mortgage bundles and issue mortgage-backed securities (MBS). Depending on how the mortgage is underwritten, many of his MBS are backed by federal agencies such as Fannie Mae, Ginnie Mae, and Freddie Mac. Investors such as investment funds, pension funds, insurance companies and foreign institutions purchase these MBS bonds. As homeowners make monthly principal and interest payments, mortgage servicers ensure that the right parties (such as investors) receive the right payments in a timely manner.
(Source: Federal Mortgage Mortgage Corporation [“Freddie Mac”])
That’s the basic premise. Today, this complex financial system that processes mortgages is dysfunctional. And in this volatile market environment, where Wall Street analysts are watching for something to go wrong that could trigger a series of financial crises, the mortgage market is a potential domino fall.
It has two developments.
One is the speed of the Fed’s interest rate hikes. Mortgage rates have risen and fallen throughout history, but rarely have they changed at the rate seen in the last few months.
This led to a sudden halt in the issuance of mortgage loans. Today, with interest rates around 7%, few people get a new mortgage or refinance an existing mortgage. It should be noted that refinancing, which replaces existing mortgages with new, often lower-rate mortgages, has provided banks and lenders with significant volume over the last few years when interest rates were low. Who wants to replace a 4% mortgage with a 6.5% mortgage he?
This trend has hit mortgage companies particularly hard. Thousands were laid off. Some mortgage lenders have declared bankruptcy (like First Guaranty) or closed (like Sprout). The rapidity of interest rate movements has resulted in heavy losses for lenders who have not yet sold their recently initiated loans. After all, no business wants to buy a three-week-old mortgage at face value if prevailing interest rates suddenly rise by 200 basis points. .
Rising interest rates have also significantly increased the effective duration of MBS bonds. If the borrower has refinanced and paid off the old loan, the mortgage will also pay off faster. Today, borrowers are more likely to hold onto their mortgages longer, effectively lengthening the time these bonds remain unpaid. The longer the duration, the more sensitive the price of these bonds to interest rate movements.
Another development is that the biggest mortgage buyers suddenly stopped buying. Mortgages and his MBS securities are less liquid than they have been in the past. The Federal Reserve, which over the past two years has bought more than $1 trillion of her MBS securities, is in the midst of a quantitative tightening policy and is no longer buying. Investment banks, another source of liquidity in the mortgage market, have also stopped buying mortgages.
In summary, the mortgage market is suddenly plagued by massive price drops due to sudden interest rate movements and massive liquidity outflows due to buyers no longer buying.
Mortgage real estate investment trusts (REITs) have also suffered. For example, Angel Oak Mortgage REIT is down 26.9% between his January 1st and September 30th. The largest mortgage REIT, Annaly Capital Management, is down 45.1% over the same period. AGNC Investment Corporation fell 44.0%.
Struggling mortgage lenders are laying off or cutting jobs, hoping to survive until the market turns around. LoanDepot reported a loss of $223 million in the second quarter, closed its wholesale business and cut nearly 5,000 jobs.online mortgage lender better dot com Even big banks such as JPMorgan Chase, Wells Fargo and Citigroup have announced massive job cuts in their mortgage departments.
Any panic or error in this environment can have a domino effect of financial ruin. Conversely, smart and contrarian investors can see great opportunities in this market.
Views expressed in this article are those of the author and do not necessarily reflect those of The Epoch Times.