Mortgage Rates Hit a Multi-Year High: Who Goes Bankrupt First?
The Federal Reserve’s latest action to hike mortgage rates to a multi-year high has taken many by surprise. With the current low-interest rates, coupled with a low inflation rate, many homeowners have been capitalizing on the favorable conditions. However, the Fed’s decision to boost mortgage rates could have implications on which lenders will go bankrupt first.
For homeowners, the move means increased mortgage payments. With the higher rates, homeowners who took out adjustable-rate mortgages could see a rapid increase in their payments. Meanwhile, those who opted for the more conventional fixed-rate mortgages will experience an increase in their overall mortgage payments as well. Homeowners without the financial flexibility to pay more could be forced into a difficult situation in which they may have to choose between keeping their homes and covering other living expenses.
As for lenders, the increase in rates has put them in the precarious position of balancing rising loan default risks with higher premiums. Though lenders are already tightening their criteria for issuing loans, they are now faced with another significant deterrent: higher rates for issuing loans. These higher rates could make it more difficult for lenders to make a profit in the current environment. As a result, lenders may find themselves on the receiving end of loan defaults.
The increase in mortgage rates is a sign that the Fed is no longer accommodative with regards to lending. In fact, the central bank has gone on record stating that they are not in the business of bailing out borrowers who fail to meet their obligations. As such, lenders are now forced to take on greater risks in order to make a profit.
Given the current economic circumstances, it is inevitable that some lenders will go bankrupt first. With the higher mortgage rates, borrowers with good credit are likely to default on their loans if they find themselves unable to cope with the strain. As for lenders, they will undoubtedly experience a reduction in profitability due to the higher cost of loan origination. This could eventually force them into bankruptcy as well.
As the mortgage rates remain at a multi-year high, it will be interesting to see which lenders and borrowers will suffer the most. Although it is difficult to predict which group will suffer first, one thing is certain: the consequences of the higher rates will ripple throughout the economy for some time to come.
