2023-10-06 19:52:26
Alarm bells are ringing in the US due to the vulnerability of banks due to the situation in the real estate market, and although it could remind us of another crisis, that of 2007, in reality it is a different phenomenon and perhaps much worse. In the midst of this situation, it is becoming increasingly difficult for ordinary Americans to buy a home.
This is due to the explosion in mortgage rates – resulting from increases in interest rates applied by the United States Federal Reserve (Fed) – and a pressing lack of housing supply, which is already causing a drop in the number of applications. of credits and, therefore, of sales, a trend that will continue in the coming months.
Controversial analyst Peter Schiff says American banks face a much bigger problem today than in 2007, when the financial crisis shook the foundations of the global economy. It’s possible.
From his point of view, the current scenario of the real estate market in the American Union presents signs of fragility that many – in the conventional financial sphere – are overlooking.
One of those worrying signs is the decline in home sales, generated as mortgage rates have increased. According to the National Association of Realtors, the Pending Home Sales Index (an indicator based on contract signing) fell to its lowest level since September 2022.
During the 2007 crisis, Schiff explains, the trigger was a massive default by borrowers due to rising interest rates and subprime lending. Back then banks lost money because default rates skyrocketed.
The problem today is more insidious, as it lies in the mortgages themselves (not in defaults). Banks made home loans at exceptionally low interest rates, often below 3 percent, when today they have exceeded 7 percent, meaning that lending institutions lose money on each mortgage, whether customers whether or not they are making their payments.
In 2009, the Fed was able to partially mitigate the negative impact by slashing interest rates, allowing mortgages held by banks to increase in value. But today the Federal Reserve has less room to maneuver due to rising inflation.
Paradoxically, Schiff notes, banks would be in a better position if there were more defaults, since they could repossess the homes and resell them with mortgages at higher interest rates.
In this environment of high interest rates, another challenge for banks is the loss of depositors, as investors are looking for returns, so they are making withdrawals from these institutions in order to invest in money markets, now more attractive, to lend money. directly to the government via Treasury bonds in the US or Cetes, in the case of Mexico.
And that makes it difficult for private companies to obtain credit, since liquidity goes mainly to the government.
“The fact that banks continue to borrow money from the Fed bailout program reveals the problems that are bubbling under the surface. The crisis is easy to see, but most people in the mainstream don’t see it,” Schiff emphasizes, and boy is he right.
Stopping the flow of credits: the elephant in the room
It should be remembered that interest rates have experienced strong movements in recent months. Yields on 10-year Treasury bonds during the third quarter soared 73.5 basis points and those with 30-year maturities rose 83.9, the biggest move since the January-March 2009 period.
Concerned about the vulnerability of US lending institutions, Deutsche Bank (ETR:) strategist Steven Zeng warns that the explosion in interest rates in the third quarter has greatly increased unrealized losses (losses) in the banks’ bond portfolios, which – we must not forget – has triggered multiple bank failures throughout the year, such as that of Silicon Valley Bank.
During the third quarter, he says, 10-year bond yields rose by more than 70 basis points, and U.S. banks held a total of $5.4 trillion in debt securities in their portfolios—mostly mortgages backed by government agencies. and Treasury bonds–, which would have devalued by approximately 140,000 million dollars during the period.
Let’s keep in mind that when the value of a bond plummets, its yield rises and, conversely, when it skyrockets, its profitability falls. Today the first thing happens.
With banks racking up unrealized losses totaling $558.4 billion in the second quarter due to rising yields (i.e., falling bond values), the estimated increase of around $140 billion in capital losses would lead to these figures to a new record of 700,000 million, potentially reducing their willingness to lend and slowing the flow of credit in the economy.
The thread will break at its thinnest
The topic of topics in the financial economic world is called interest rates or rates of return.
The Fed in the US and Banxico in Mexico promise to keep them high “for a long period”, and if they comply they will cause economic tensions that will manifest themselves in more sharp falls in the stock markets and bankruptcies with potential systemic risk.
The rope will break at the thinnest, but it is impossible to know if it will be in the banking sector, the business sector or some country. We will have to stay attentive.
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