Some Lenders Might Take Even More Risks To Stay Afloat

The Federal Reserve's efforts to cool heated inflation have resulted in a slowdown in the mortgage market. To calm the economy, the Fed raised interest rates twice this year and stopped its largest mortgage-bond buying program this spring. This has raised mortgage borrowing costs, putting a stop to the nationwide refinancing frenzy and even forcing some homebuyers out of the market.

  • According to industry data firm Inside Mortgage Finance, originations at the 50 top lenders decreased 41% year over year in the first quarter
  • Furthermore, the Mortgage Bankers Association predicts a 37% decline in mortgage volume in 2022
  • According to the Urban Institute, mortgage lenders made $2.36 profit on every $100 loan in March, the lowest amount since 2019. That figure was as high as $5.99 in 2020

Now, some lenders are selling assets such as their mortgage payment collection rights while others are attempting to increase business by lowering rates or reducing costs.

FinTech Is In Trouble

The Wall Street Journal reported last week that Klarna is aiming to raise a fresh round of capital at a $30 billion valuation, almost one-third less than the $46 billion it was valued at nearly a year ago.

  • This brings privately listed companies closer to their public counterparts as Affirm, a competitor Buy-Now-Pay-Later (BNPL) service, has experienced a 75% drop in its share price this year
  • According to TechCrunch, Klarna is also cutting off 10% of its global workforce, or 700 employees

Rationalisation Or Value Destruction?

Higher rates may not cause many FinTech businesses to fail. The blame might be rather placed on risk taking that was disguised as "innovation". This can certainly be said of many BNPL businesses who invented nothing besides a way for consumers without credit scores to access loans.

  • According to a recent research from Sfgate, more than 70% of its BNPL users are Gen Z (born between 1997 and 2012), and about 40% of them had missed at least one payment
  • Meanwhile, according to a Fox Business report, over 30% of BNPL customers are having trouble repaying their debts, and rising yields isn't helping matters

"The most popular reason (42.40%) consumers utilized BNPL services for their transactions, according to DebtHammer's survey, was because of their inability to afford items without the payment plan." By for Fox Business


Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.


Photo by Eduardo Soares on Unsplash.