LAS VEGAS - With mortgage rates headed to 8%, the current housing slump is unlikely to reverse course until 2025, due to the Federal Reserve's continued ratcheting up of interest rates, mortgage experts said at a conference in Las Vegas.
Analysts continue to warn about overcapacity in the industry with too many lenders and employees to support current origination volumes.
Federal Reserve Chair Jerome Powell signaled last week that interest rates need to stay higher for longer to tame inflation and that it could raise interest rates once more this year. The Fed's policies have hit potential homebuyers the hardest as mortgage rates approach their highest levels in 23 years, analysts said.
Federal Reserve Chair Jerome Powell said today's high mortgage rates are dissuading some would-be sellers from putting their homes on the market, further limiting lending opportunities in an environment already constrained by low inventory
"If the Fed keeps rates where they are today, then I think you're going to easily see 8% mortgages because the survivors in the mortgage market — once we get rid of another 50% of capacity — are going to want to make money and that's how they're going to do it," said Christopher Whalen, chairman of Whalen Global Advisors, on Tuesday at the National Mortgage News Digital Mortgage conference in Las Vegas.
Whalen was joined by Mark Calabria, a senior advisor at the Cato Institute and the former director of the Federal Housing Finance Agency, in a debate about current public policy and its effect on the mortgage market.
Calabria said the main obstacle to buying a home is finding a house that is affordable. He questioned the Biden administration's public policy approach, which is focused primarily on providing access to credit to low and moderate-income communities at a time when mortgage rates are above 7% and home prices are still rising due to a lack of inventory.
"There's just too much tension in Washington where the sense is that we're going to make the mortgage market and mortgage policy the answer to all these other unrelated things which are real — there are very real social injustices we should fix — but the mortgage market is not the solution for all of them," Calabria said. "I worry that mortgage policy is bearing the weight of trying to fix a number of things that really have very little to do with the mortgage markets."
Calabria, the author of "Shelter from the Storm: How a COVID mortgage meltdown was averted," described how he resisted repeated calls for a bailout of mortgage servicers early in the pandemic. The Federal Reserve had stepped in with a broad array of actions including lowering interest rates, sparking a massive refinance boom in 2020 and 2021. Calabria then applied an adverse market fee to refinances but exempted lower-income borrowers.
Julian Hebron, founder of the Basis Point, a consulting firm, and veteran mortgage executive, questioned whether the FHFA should be setting pricing in the mortgage market and asked whether it's "appropriate for GSEs to raise fees to build capital to prepare for downturns."
Calabria said the government-sponsored enterprises should be charging so-called g-fees for guaranteeing the timely payment of principal and interest on mortgage-backed securities because doing so covers projected credit losses from borrower defaults over the life of a loan.
"Ultimately, I don't think the regulator should be driving prices," Calabria said.
He also said Fannie Mae and Freddie Mac will remain in conservatorship for the foreseeable future but also envisions a way out of government control — by having the GSEs raise fees.
"If you're a CEO of one of these companies, it sucks being micromanaged, and I know that as somebody who micromanaged the CEOs," he said. "If I was the CEO of one of these companies and I had the freedom to do it, I would jack up G-fees so I can build capital and get out two or three years earlier than I would otherwise. Because again, it sucks being in conservatorship for these companies, at least at the top."
Calabria took office in 2019 and sought to end government control over Fannie Mae and Freddie Mac, which guarantee 70% of the roughly $12 trillion U.S. mortgage market. Though Calabria was confirmed by the Senate to a five-year term, he was fired in 2021 by President Biden following a Supreme Court ruling. Biden named Sandra Thompson as Calabria's successor.
Whalen laid the blame for the current high interest rate environment squarely on the Fed and its actions in dropping rates in response to the pandemic. Roughly 90% of homeowners currently are locked in to mortgage rates below 6% and many are paying less than 4% on loans that were refinanced when the Fed held interest rates near zero. As a result, homeowners are not selling their properties, resulting in record-low inventory and a general gumming up of the mortgage market in a high-rate environment.
"The trouble is that the Fed's actions through COVID distortéd the market so much that lenders are losing 200 to 250 basis points on every loan they make," said Whalen. "Even though the agencies and the FHA subsidize the cost of mortgages, that's really what they do, it's not about getting a mortgage, it's about how much does it cost every month, which goes across every product in America."
Many forecasts that are well-founded in data have been upended by major events, such as COVID or a bank failure. Whalen said that the only way mortgage rates could get down to 6% or 6.5% in the near-term is if there is another bank failure.
"If we see another surprise in the banking market, the Fed is going to be forced to back off," said Whalen, adding that he is concerned that interest rates are making asset prices go down. "If we see another failure, they are going to probably have to turn to the Treasury for support or tax the industry to raise cash because there won't be three or four buyers out in the room."
