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Whalen Global Advisors has published a new report, "Outlook for U.S. Residential Mortgage Finance 2023," which is available for subscribers of the Premium Service of The Institutional Risk Analyst. Non-subscribers may also buy a stand-alone copy of the report in WGA's online store.

"Mortgage issuers lost over $600 per loan in the third quarter," notes WGA Chairman Christopher Whalen. "We look for some truly ugly financial disclosure from banks, REITs and mortgage companies in Q4 2022 and thereafter. There are literally dozens of banks in the US made insolvent by the rapid policy moves of the FOMC over the past year. Somebody ought to ask Chairman Powell about this."

In the latest WGA report on the housing market, the following trends are examined including:

• Home Prices: Home prices are expected to fall by double digits in 2023 with the largest decline in prices above the 300k average loan size. High-priced assets are already experiencing price compression
• Lending: Bond market indicators suggest that the US could see double digit mortgage rates in Q1 2023, with the premium contract for Fannie Mae MBS in December at 6.5%
• Risk: Banks and REITs face mark-to-market losses on loans and mortgage backed securities (MBS) that could be far larger than the visible mark-to-market (AOCI) losses WGA has discussed in past issues of The Institutional Risk Analyst.
• Liquidity: Falling mortgage lending volumes and record low issuer profitability data from the Mortgage Bankers Association suggests rough waters ahead for issuers.
• Default: Signs of rising cash advances on delinquent loans in the government loan market suggest that 2023 may be the return of the distressed loan trade as a strategy for institutional investors.

"When Fed Vice Chair Lael Brainard says that the FOMC should slow interest rate hikes, she is right, but for the wrong reasons," Whalen notes. "The financial industry is reaching the breaking point because of the huge market volatility created by the Fed's rapid interest rate increases. We created the problem with inflation over years, so we all need to be patient in terms of the solution."

Regarding the situation in the housing market, Whalen suggests that falling home prices and rising loan delinquency may result in the return of the distressed loan trade of a decade ago following the 2008 financial crisis. "We think that default rates among residential mortgages could easily return to pre-COVID levels in the mid-teens for FHA loans," says Whalen. "A recession will drive these numbers even higher."

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