Rising Interest Rates Are Killing Off Mortgage Lenders

The Federal Reserve’s interest rate hikes aimed at cooling off red-hot inflation are making collateral damage out of US mortgage lenders, many of whom are being forced into bankrupcty as sales volume in residential real estate markets plummets even as prices (for now) remain high.

This won’t be a replay of the 2007-2010 subprime mortgage crisis, however, for the simple reason that banks have a diminished share of the residiential mortgage market, which is dominated by non-bank independent lenders.

“The nonbanks are poorly capitalized,” said Nancy Wallace, chair of the real estate group at Berkeley Haas, the business school at University of California, Berkeley. “When the mortgage market tanks they are in trouble.”

In 2004, only about a third of the top 20 lenders for refinancings were independent firms. Last year, two-thirds of the top 20 were non-bank lenders, according to LendingPatterns.com, which analyzes the industry for mortgage lenders. Since 2016, banks have seen their share of the market shrink to about a third from about half, according to news and data provider Inside Mortgage Finance.  

Unlike banks, which have deposits and other capital sources for funding mortgage activity, the independent lenders depend on credit markets. Rising interest rates not only make mortgages more expensive for prospective home buyers, but also dry up mortgage lenders’ primary source of capital.

Still, the immediate fallout from a rising wave of COVID bankruptcies among US mortgage lenders is unlikely to have a 2008-style “Lehman Brothers” moment.

There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. But market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates. More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat.

America is not facing a real estate market crash such as is taking place in China, nor will it precipitate a nationwide banking crisis such as is also taking place in China. America is facing a housing supply crisis, one which rising interest rates will make worse before it gets any better, with shelter price inflation leading to shelter insecurity leading to homelessness as the contagion effect.