Mortgage Lenders are Going Out of Business! How Does This Affect the Real Estate Industry?
This year we have seen rising interest rates and possibly another hike by the end of the year. How does the fall of mortgage lenders affect customers? The inflation rate has also been increasing rapidly, which leads the Fed to increase the interest rate to curb the rising inflation. As of August 2022, the 30 years US mortgage rate is above 6%, and the inflation rate as of June 2022 is 9.1%. This spike poorly affects the consumer’s spending power. Many businesses close and directly increase the unemployment rates.
Why are mortgage lenders going out of business?
Recently there was news on some lenders who choose to file for bankruptcy and made margin calls. Most of these lenders are non-banks. They are independent lenders who offer risky loans, which a bank will frequently decline. The mortgage they provide is not government-backed, thus making it impossible for them to stay afloat in the current economic condition.
Due to high-interest rates, many lenders fail to gather new loans, thus making it nearly impossible to acquire new investors. Usually, lenders will constantly collect new loans and bundle them with bonds to make them attractive to investors, so when there are no new loan activities, lenders need to obtain a line of credit to pay the interest due to existing investors. Lenders who actively collaborate with government-backed agencies like Fannie Mae and Freddie Mac are less likely to suffer. Usually, the lenders who work with these agencies offer less risky home mortgages. Major banks are also seeing some shrinkage in the mortgage business, leading to many layoffs to cut down expenses.
According to Bloomberg News, Wells Fargo is reducing their home loan business, and this trend will also be seen in other major banks. Unlike banks, independent lenders don’t have emergency funds to sustain their business. They usually rely on short-term credit lines, which depend on mortgage prices. So, when they are stuck with bad assets, they need to make the margin call and potentially fold their business.
When a lender goes bankrupt, as a part of the bankruptcy proceedings, existing customers will continue to make mortgage payments to a new lender to which the business has been sold. The terms and interest rates might vary according to the new entity’s mortgage program.
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How does this affect customers who are seeking a mortgage loan?
Individuals seeking a mortgage loan now face many issues in securing the loan amount at an affordable price. Due to decreasing lenders in the market, options are very limited, thus making it a seller’s market. It simply means that customers are left with choices that might not be favorable. A little under three years ago, a 30-year mortgage loan rate was below 3%, which doubled in the current years.
Someone who could afford a $500k worth of loan three years prior could only qualify for $250k or less now with the same level of income. The real estate market has been negatively affected and it has been a seller’s market due to low inventories. Property prices have skyrocketed in the last few years. A single-family home which used to be in the lower 300k price has now increased to the high of 500k, thus making it impossible for most home buyers to own a house. Even building a house is not an option because the materials, such as umber to concrete are so expensive.
Construction and homeownership
Many small-time home builders or contractors are losing their business or finding it hard to make it thru the current condition. So there is also a decrease in the manpower available in the home construction field. Many potential home buyers are left with the choice of waiting until everything simmers down shortly, possibly extending or opting for rental homes.
Based on my experience, selling and owning a home in the current inflated economy has been lengthy. Finding an affordable rental has been like a race whereby you must act fast before it goes off the market in a matter of minutes. Many experts are projecting a slow recovery in the real estate market and expect it to stabilize by the end of 2023.
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What can potential home buyers do now?
The right decision is to wait till the market stabilizes. You can consider the next option as an affordable way to construct a home, like a barn dominium home. Building these types of dwellings costs way less than a stick build home. As we can see in the market, many are taking advantage of the soaring property prices and liquidating their homes for a higher value. They then purchase a motor home, move into a rental property, and sit on the excess equity until it is right to buy the ideal house. Whoever purchases a home with high-interest rates or planning to do might look into refinancing the mortgage when the rates go down to lock in a lower monthly payment with possible equity on the property.
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Conclusion
To wrap it up, the rising interest rates and inflation affect both, people and businesses. It is a chain reaction that impacts everyone. Small-time lenders are going out of business, and people are losing their affordability to own a home. This scenario is negatively affecting the real estate industry. It is a waiting game for the market to slow down and anticipate the Fed to reduce the interest rate, which is going to happen sometime next year. Several events influenced the economy over the past years, starting with the pandemic and geo-political issue. It has been proven in the past years that the market will anticipate positive changes right after the mid-term election. Being up-to-date about current events is essential to weigh all the possible decisions for a better outcome.
How can Startup Tandem help you?
At Startup Tandem will be able to provide you with informative advice and recommendations that suit your personal and business goals. We have a Finra-licensed professional who could provide consultations on the capital markets. We can also look at other financial areas of a business that need expansion, such as growth, or merely structuring the investment plan to achieve the ideal business goals. Please visit Finance and Business Advisory | Startup Tandem.
Reference(s)
- https://www.bloomberg.com/news/articles/2022-08-19/mortgage-lenders-are-starting-to-go-broke-as-loan-volumes-plunge
- https://tradingeconomics.com/united-states/inflation-cpi