Garnet Capital Advisors Blog

April 17, 2014

Plunging mortgage lending could affect loan sales by reducing supply

U.S. mortgage lending plunged during the first quarter of 2014, and this development could easily affect the price and volume of loan sales by reducing supply.

Mortgage lending plunges in Q1
Mortgage Bankers Association data revealed that during the first three months of this year, lenders issued $226 billion worth of mortgages, according to Bloomberg. This represented the most lackluster activity since 1997. In addition, the quarterly figure was less than one-third of the average amount of mortgages issued during any quarter in 2006.

Paul Miller, a banking analyst at FBR Capital Markets, hit the nail on the head when estimating first-quarter mortgage origination activity, forecasting that it would total $226 billion, The Wall Street Journal reported. At the time, he cut his prediction for full-year originations to $1.1 trillion from $1.2 trillion.

Several factors combined to create the sharp decline that mortgage lending suffered during the first three months of 2014, the media outlet reported. Refinancing activity has deteriorated significantly. In addition, fewer Americans can buy homes since investors are keen to get in on the action, and keep purchasing properties using cash. Interest rates have been trending higher since about halfway through last year when Ben Bernanke, chairman of the Federal Reserve, said that the central bank might start tapering its stimulus soon.

Interest rates have been rising
Amid these various headwinds, many executives have asserted that the mortgage market is currently undergoing a major structural change after interest rates started increasing in 2013, according to the news source. In a matter of weeks, these borrowing costs surged a full percentage point - rising to 4.6 percent in late June compared to 3.6 percent in mid-May.

The tapering of Fed stimulus could potentially push interest rates higher, as the money supply starts growing at a slower pace and there is less capital available for industry participants to lend. In addition, the central bank has hinted at its plans to hike its benchmark borrowing costs higher in the future, which would also put upward pressure on interest rates.

Stephen Stanley, chief economist for Stamford, Conn.-based Pierpont Securities LLC, told Bloomberg about the new conditions that the mortgage market will face.

"Banks large and small are going to have to adapt to a new reality because mortgage origination volumes going forward aren't going to support the big businesses they've had in place for the last few years," he told the news source.