Bottom Line: As mortgage demand plunges on the back of historical unaffordability and lender margins have rarely been worse, lenders continue to ease credit just like during the 2003 to 2006 Fed tightening cycle.
The new Fannie quarterly lender survey came out today. It was bleak for lender volume and margins.
Easing credit standards is one way to combat historical, end-user, shelter buyer, house-price unaffordability and persistent, punishing, lender profit margin contraction.
In fact, easing credit was the exact tool used to combat these same pressures from 2003-06, as the Fed took funds from the 1%’s to 5.25% in “that” tightening cycle (remember, it’s never “different this time”).
This said, I remain bullish on the 5-year outlook for lending, as it ultimately transforms into something new; i.e., a hybrid of traditional lending, exotics of 2003-07, and mods.
The new era of lending will come because the Gov’t will own most all mortgage risk by then. And we learned in the crash that it thinks it’s less “risky” to lower mo payments on its loans by any methodology necessary than make people pay more than they can afford, or want to pay (especially, when house prices are in decline).
Yet, I remain bearish on the next year to two, as the industry at large — lenders, title, escrow, legal, realtor & fintech — consolidates out of necessity before the new era of lending appears.
Preparing for the new era should be top priority for lending and fintech firms post haste.
Below are two simple charts that paint the picture of lender desperation.
ITEM 1) As loan demand plunges and margins remain horrid:
ITEM 2) Lenders decide to ease credit just like in the 2003 to 2006 tightening cycle.