Fannie Mae’s economic forecasters say the bank runs of the last few weeks could be the trigger that tips the country into a recession as banks tighten commercial lending standards and consumer confidence worsens.
“Inflation has now been joined by financial stability concerns as threats to sustained growth,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a statement. “These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022.”
The government-owned mortgage-buyer’s Economic and Strategic Research Group issued its latest quarterly predictions Monday, which said the recent turbulence in the banking sector will likely significantly tighten the jumbo mortgage market and hamper construction lending even as it might push down mortgage rates.
The jumbo loan market is typically financed not through mortgage-backed securities, but instead through banks’ own balance sheets. So as bankers tighten their lending criteria in the face of liquidity stresses, Fannie Mae’s forecasters said, they will likely reduce the number of these loans they originated. With fewer jumbo loans available – the upper limit for a conforming loan in Connecticut is $726,000 for this year – Fannie Mae forecasters say they expect more subdued home purchase lending despite the potential for lower rates.
“While housing writ large has responded to the Fed’s monetary tightening in a relatively predictable fashion, the rapid uptick in home sales in response to modest rate declines earlier this year corroborates our long-standing expectation that the housing sector will help moderate any future recession due to the significant pent-up demand,” Duncan said.
Likewise, commercial real estate lending, which has been heavily dominated by community and regional banks, will likely be dragged down too. Debt researchers at Trepp said recently that some metro areas with poor office sector performance could see the value of their office buildings written down at a time when around $270 billion in commercial real estate loans are set to mature nationwide in 2023, including $79 billion in the office sector. Both Hartford and Fairfield County have seen their office sectors continue to exhibit stubbornly high vacancy rates in the face of work-from-home trends.
In March, the Real Estate Roundtable, a national commercial real estate lobby group, asked federal regulators to give lenders more flexibility to work with borrowers, as refinancing requests have been hampered by rising interest rates and uncertain future valuations.
In total, the researchers write, the effect may be similar to the Savings & Loan Crisis from the late 1980s and early 1990s.
‘When the fed funds rate spiked in the early 1980s to nearly 20 percent, up from around 5-7 percent a few years earlier, many were unable to attract deposits, while the funding that was available was increasingly only available at rates above that of their earnings assets, eventually depleting their capital. Also like today, any institution seeking loan sales as an avenue to raise cash would have had to take large losses even if credit performance was strong,” Fannie Mae’s forecasters wrote.
Staff writer Steve Adams contributed to this report.
