Mark Indelicato and Mark Power, Financial Restructuring & Bankruptcy partners in Thompson Coburn’s New York office, discussed the current slump facing the U.S. mortgage industry with National Mortgage Professional. They highlighted the impacts affecting the industry, such as declining profits and increased bankruptcies resulting from rising interest rates.
"Last year's market — which has continued into 2023 — is something that both Power and I describe as chaotic," Indelicato said. Power added that when the market tightened, loans with locked rates caused mortgage companies to lose money from loans, leading to significant cash drains on liquidity. "Banks who lend to them started holding back and charging higher interest rates," Indelicato said.
Power further elaborated, “What’s contributing is that banks don’t have a big enough balance sheet, and [they] will see more defaults, especially those with adjustable-rate mortgages. People are going to try and sell their homes. There’s going to be a decline in the real estate values of the homes because there will be more inventory. We saw the same thing in 2008. The amount of cash needed to service mortgages just became too much, and banks couldn’t keep up.”
Indelicato and Power emphasize the importance of liquidity management, proactive risk practices, and diversified lines of credit as essential strategies for mortgage companies to weather the storm successfully. The exit of traditional banks from the industry has left non-bank financial institutions thinly capitalized and volatile. Although salvaging mortgage company assets during bankruptcy is a complex process, there is still potential to monetize certain assets. While the situation may not lead to a recession as deep as in 2008, higher interest rates will likely affect the home market and the construction industry.
Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you (an ‘engagement letter’).
By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and, further, even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you. Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.