Whalen Global Advisors Releases Housing Finance Outlook

Mortgage Rates to Rise, Lending Volumes Flat Through 2025

Whalen Global Advisors ("WGA") published its latest outlook on the U.S. Housing Finance Sector. WGA Chairman Christopher Whalen, who is a contributing editor at National Mortgage News, sets the stage for 2H 2023 in the world of lending and secondary market loan sales:

"The Case-Shiller index rose through May 2023, with all major indices moving up despite the rising interest rate environment engineered by the FOMC," he notes. "Average prices in New York, one of the weakest U.S. residential home markets, continue to rise in 2023." WGA notes that home price inflation is strong and prices are likely to rise in many markets until the Fed pushes interest rates significantly higher.

"With the premium conventional mortgage contract in the forward TBA markets now a 6.5% MBS for delivery in September, secondary market premiums are slim to none," Whalen notes. "Lenders need to write 7.5% to 8% coupon loans to generate secondary market premiums. The Treasury yield curve inversion means that net secondary mortgage market execution may remain negative through 2024."

The WGA report notes that a number of mortgage lenders believe that residential mortgage interest rates will slowly rise towards 8% and volumes are likely to be at or below $2 trillion in new loan originations, with more than 90% purchase mortgages in that flow for the next two years. This suggests that lending capacity in the mortgage industry needs to decline by about half in order for the surviving lenders to become profitable.

"The new Basel capital proposal for banks will cut the profitability of mortgage lending in half according to most large banks," Whalen observes. The new WGA report notes that the Basel risk weighting for 1-4 family mortgages will increase dramatically if the Basel proposal is adopted. As a result, banks will be sellers of mortgages rather than retaining loans in portfolio, the report notes.

The WGA report notes that mortgage industry lending volumes are likely to remain at or below $2 trillion in 2023 and 2024. Several prominent mortgage lenders cited in the report expect that mortgage loan rates will remain at or above current levels for the next several years. After '27, these same operators foresee a correction in home prices back to approximately 2020 levels.

Copies of the IRA Housing Finance Outlook are available to subscribers to the Premium Service of The Institutional Risk Analyst. Standalone copies of the report are also available for purchase in our online store. Media wishing to receive a courtesy copy of the report please email: info@theinstitutionalriskanalyst.com

About Whalen Global Advisors LLC

Whalen Global Advisors LLC (WGA) is a New York-based consulting, risk analytics and publishing company that focuses on financial institutions and global markets. WGA publishes The Institutional Risk Analyst (ISSN 2692-1812), including commentary on the capital markets, industry reports and company profiles. For additional information, please contact us at: info@rcwhalen.com

Source: Whalen Global Advisors LLC