In June, I reported that mortgage loan applications hit a 22 year low. The steep drop in lending was unquestionably due to the Federal Reserve’s decision to impose the highest interest rate hike in nearly three decades. As a result, the average 30-year mortgage interest rate jumped from just 3.27% at the start of 2022 to nearly 6%.
So it’s not surprising that some mortgage lending companies are beginning to buckle under the financial pressure.
According to a recent article in Bloomberg, First Guaranty, a large lender with over 20 branches in the US, declared bankruptcy earlier this year. Court filings show that the lender owes Flagstar Bank and Customers Bank approximately $418 million. It remains to be seen whether those institutions can recover after such a loss.
Loan Depot, another prominent lender, fired 4,800 employees last month with its CEO Frank Martell noting,
After two years of record-breaking volumes, the market has contracted sharply and abruptly in 2022…We are taking decisive action to meet this challenge.
Unlike traditional banks, independent mortgage lenders like Loan Depot and First Guaranty tend to be poorly capitalized and less capable of withstand such market declines. Additionally, private mortgage lenders, unlike banks, cannot tap into government-funded emergency financing lines.
As noted by ZeroHedge:
Lenders usually try to make loans worth 102 cents on the dollar to cover upfront costs, though some are taking substantial losses and can’t sell them for around 85 cents. It appears the Fed-induced rate shock is the culprit behind the implosion of the private lenders. We assume more failures are ahead.