Despite the hopes of market bulls who dare to dream, we’re not likely to see the Fed abandon interest rate hikes anytime soon. This was made crystal clear on September 13, 2022, with the release of the latest BLS inflation report, which showed costs up 8.3% year-over-year from August 2021 to August 2022.
The report caused the biggest -day market decline in the past two years, causing the Dow Jones Industrial Average to tumble 1,276 points (3.9%) in a single day. Nasdaq fell dramatically as well, losing 5.2%; with the S&P 500 not faring much better, dropping 4.3%. This guarantees the Fed will move forward with next week’s 75-basis-point interest rate hike, and probably hold its policy rate at that level for an extended period — at least until inflation peaks.
This presents a quandary for asset managers, businesses, lenders, retail investors, and anyone with a stake in the health and long-term growth prospects of the American economy.
So, can lenders deploy capital safely in this market? The answer is: it depends.
There’s no doubt that foreclosure rates are on the rise. In fact, they’ve been increasing steadily for the past few months.
As the economy improved, many people were able to keep up with their mortgage payments. But as interest rates have risen, more borrowers are falling behind — particularly those with adjustable-rate mortgages that fluctuate with market rates and can unexpectedly inflate monthly mortgage payments.
During the pandemic, pending foreclosures were stayed due to ongoing state and federal implementation of court moratoria, new foreclosures were halted, and emergency notice requirements caused additional delays. Now that the stays have been lifted and banks are permitted to proceed with new and pending actions, they’re starting to foreclose on properties again.
The US economy is currently facing challenges from energy costs, the lingering effects of the pandemic, and ongoing supply chain issues.
For lenders, this means an increase in losses due to the number of properties they must monitor and maintain during the foreclosure process. As foreclosures increase, lenders are forced to put more resources into dealing with them. This includes hiring more staff, taking on more legal expenses, advancing more funds for unpaid taxes and insurance and property maintenance, and spending more time and money on marketing and selling REO properties.
In addition, as foreclosures increase, the value of the lender’s portfolio decreases. This is because foreclosed properties are typically sold at a discount, and tend to be in poorer condition than properties that were not foreclosed upon. As the value of the portfolio decreases, the lender’s capital reserves are depleted, which can put the lender at risk of failure.
The increase in foreclosures is also bad news for the housing market as a whole. It puts downward pressure on prices, and makes it harder for people to sell homes and pay off their loans. This, in turn, can lead to even more foreclosures, creating a vicious cycle.
To take your loan portfolio from good to great, you need to be creative. If lending was easy, everyone would do it. Many lenders, asset managers, and retail investors will naturally view rising foreclosures as a challenge to overcome. After all, it’s not exactly a great sign for the prospects of the economy when more and more people are losing their homes.
However, there is often opportunity in adversity, and utilizing solutions to ensure that your portfolio doesn’t just survive, but thrives in a time of heightened market volatility, can ensure the long-term growth and stability of your loan portfolio.
One way to get an edge over the competition is the careful use of portfolio-protection solutions like AXY Wrap™. This innovative product, developed in-house by market leader Axylyum, offers loan portfolio managers a wide range of benefits to help defend against rising rates of foreclosure. These benefits include excellent liquidity support, credit enhancement through FPD, EDP, and seasoning protection, and perhaps most importantly when foreclosures are on the rise, the ability to mitigate risk by shifting default exposure.