Look Out Below: The Mortgage Market Is About to Revisit 2008 Crisis Woes Part II

Shah Gilani|May 13, 2020

Last Friday, I gave you this warning: The mortgage market is once again in danger, only this time the damage is going to be a lot worse, last a lot longer, and impact the housing market and the economy in worse ways than the 2008 financial crisis did.

I laid out all the details and data in Friday’s article, which you can read here, but today, I want to get into it a little bit more. It’s going to be hard to hear, but it’s absolutely necessary, since it will affect your Total Wealth.

If you thought the worst of the financial crisis was way behind us, you’re about to get a rude awakening.

Mortgage Massacre 2.0 is right around the corner.

Here’s how “forbearance” and “rent strikes” are already impacting the mortgage market and how what’s barreling down on us is going to make 2020 look like 2008 all over again.

How so you ask?

Jobs, jobs, jobs.

Since the pandemic gripped the U.S. more than 33.5 million workers have filed for unemployment benefits. The rolling 4-week average is now more than 4,100,000 benefit claims per week.

In just the month of April, the Bureau of Labor Statistics reported 20.5 million non-farm payroll jobs were lost.

The unemployment rate has soared from 3.5% in early February to 14.7% today.

The Jobs Coronavirus REALLY Took is Much Bigger Than We Think

But, even BLS admits the 14.7% number understates the real unemployment rate.

Because unemployment is calculated via a survey BLS conducts over a week, in April it was from April 12 through April 18, it’s a “snapshot” and requires seasonal and other extrapolations be incorporated in the measure.

For one thing, BLS said only 70% of surveyed households responded, far less than the typical 83%. BLS also commented on its own survey results, with skepticism, saying the estimated 9 million people (that number is an extrapolation) answering they were employed but “absent” over that week is unusual. In commentary on the survey BLS said the unusual number, about 7.5 million more than typical, indicates those people should probably have been recorded as unemployed.

If they were, the national unemployment rate would be 19.7%.

The U6 measure of unemployment that includes workers who say they’re discouraged and not looking for work and workers working part-time who want to be employed full time stands at 22.8%. That number’s also being questioned.

A lot more jobs have now been lost in eight weeks than were created over the prior decade.

Unemployment at 20% is twice what it was at the depth of the 2007 to 2009 Great Recession.

In 1933, the low point of employment during the Great Depression, unemployment was estimated to be 24.9%.

We might get there before workers start to get rehired.

Why What Happens Next Will Affect Mortgages

Housing prices nationally have only held up experts say because there’s little inventory for sale. But they expect that to change.

Housing inventory, or the number of homes available for sale, has been low for a while. As of February 2020, inventory is down nearly 10% year over year, dropping from a supply of 3.6 months to a supply of 3.1 months.

Real estate brokerage Redfin says it sees a nearly 150% jump year over year in for-sale homes being taken off the market during the last full week in March 2020.

So far, the drop in homes for sale has been supporting price levels.

But, “Home sales will decline significantly,” says Tendayi Kapfidze, LendingTree’s chief economist.

As forbearance runs out, homes for sale will flood the market in the hardest hit areas, depress prices, and impact securities and lenders tied to more troubled mortgagors.

The central bank’s decision to buy a nearly unlimited supply of government-backed mortgages has helped calm skittish markets. But the market for loans in which the government doesn’t shoulder the risk is coming undone.

Investors are abandoning that market, starving lenders that extend mortgages to borrowers who don’t qualify for conventional loans. Those lenders are halting operations and bracing for a sharp rise in missed mortgage payments during pandemic.

One lender, Angel Oak Cos., laid off 70% of its staff and put originations on hold for two weeks because it said it couldn’t properly evaluate applicants’ credit risk.

Citadel Servicing Corp. and Sprout Mortgage have put put some originations on hold.

Problems in parts of the mortgage market related to what investors and originators expect as housing prices in several parts of the country crash, could persist until well after the U.S. economy emerges from lockdowns.

Borrowers already are struggling to line up financing that was readily available just weeks ago.

A Bad Setup Just Got a Whole Lot Worse

The market for mortgages not backed by the government nearly disappeared after the housing market imploded in 2008.

Nonbank lenders, who can originate as much as 60% of U.S. mortgages, rely on lines of credit from banks and non-bank finance companies to fund their loans. These warehouse lenders, as they’re known, recoup loan money when they sell mortgages they make to investors. But warehouse lenders often pull back as risks rise, and now they are raising lending standards, as most bank lenders have done, and aren’t looking to make loans in some areas.

The sinking economy and uncertain outlook for housing has battered investors who loaded up on mortgages that lack government guarantees. Fund managers who oversee huge investment pools of mortgage-related instruments and products have faced withdrawals, forcing them to sell assets to raise cash and reducing the pool of buyers for these loans.

Mortgage real-estate investment trusts-publicly traded companies that typically use leverage to boost returns-had been a growing presence in the market for mortgage-backed securities. Now many of their banks are asking them to put up additional collateral for their loans in margin calls.

As non-agency mortgage lenders pull back more loans will be channeled through the Government Sponsored Enterprises Fannie and Freddie that bankrupted themselves in 2008.

Too bad they’re already loaded up with non-performing mortgages, technically in forbearance.

When home values underlying MBS, both government guaranteed and private, start to falter and fall, the same negative feedback loop that tore up homeowners and MBS investors and banks and finance companies and investment houses in 2008 will revisit the economy and further slow the country’s recovery.

Your Next Move

But, not to worry. Just like in 2008, there are lots of ways to make money from what’s just starting to unfold.

I’ve started to target some of them, and so has my friend, Tom Gentile. Tom has honed in on blue-chip stocks, and he’s aiming to trade them for seven-figure returns, that could mean windfalls beyond your wildest dreams.

In fact, in a live Zoom call, Tom started trading and with a click of a button nearly $15,000 was instantly deposited into his account.

It wasn’t a fluke or a trick, it wasn’t chance or pure, dumb luck. No, this was a brand-new strategy Tom developed. The only thing you have to do to begin is make your move. It’s really that easy.

You could be collecting payouts within 24 hours after you start. Depending on the size of your investments, you could potentially turn five stocks into $1 million, and Tom’s ready to show you exactly how to do so. Click here to learn how you can get started on a path that can change your financial future forever.

I’ll give you more plays next week to enhance your Total Wealth.

Until then,

Shah