The Zhitong Finance App learned that Peter Schiff (Peter Schiff), a well-known American economist known as “Doctor Doom,” believes that locking in low mortgage interest rates many years ago may be one of the smartest financial decisions you've ever made, but it may also be part of the “perfect storm of impending financial ruin.” Schiff warned in an October 15 post on X: “In this looming mortgage crisis, mortgage lenders will lose far more than they lost during the entire global financial crisis (GFC).”
“Even without a single default, mortgage lenders have lost more than four times what they lost during the global financial crisis,” he claims.
He blamed this situation on the Federal Reserve's long-term low interest rates and government-endorsed mortgages that allowed borrowers to lock in cheap financing for decades. “This has planted the seeds,” he wrote.
If most of your wealth is on your home, or if you're counting on your portfolio to support your retirement, this is a sobering prediction.
However, before you start imagining another foreclosure crisis, there's an important difference: when a mortgage depreciates value to investors, it doesn't automatically mean that your house will depreciate, your monthly payments will rise, or your lender will go out of business. Also, keep in mind that if your loan or right to service it changes hands, the new company that takes over cannot arbitrarily rewrite the terms of your contract.
Why Schiff Is Seeing Trouble With Low-Interest Mortgages
Schiff wrote, “There are currently approximately $8.3 trillion in fixed-rate mortgages in existence, with an average interest rate of 4.6% and a remaining term of 25 years. Given the current interest rate of 7.5%, market-gazing losses on these mortgages are already around $2 trillion. When interest rates rise to 8.5%, losses will rise to $3 trillion!”
By contrast, Schiff puts the actual losses on defaulted mortgages between 2007 and 2010 at around $450 billion. Note that these are all Schiff's estimates; the 8.5% scenario he assumed was not today's reality. According to Freddie Mac's latest survey released on October 15, the average interest rate on a 30-year fixed mortgage is 7.40%, up from 6.27% a year ago.
The basic pricing problem is that if the interest rate on a newly issued mortgage is much higher, investors usually won't pay the full price for an old loan with similar conditions but a much lower coupon. As a result, this old loan needed to be discounted to be competitive. This decline in market value is what Schiff called a book loss. And the homeowner may still be paying the full amount on time.
A book loss does not equal a mortgage default
Schiff juxtaposed the two different types of losses — one type is financial loss due to the borrower's default, and the other is a decrease in the price at which a loan with normal repayment may be sold at the time of sale.
A mortgage loan can lose resale value even if the homeowner continues to repay it. This would hurt the party holding the loan, but that's not the same thing as the borrower defaulting on the contract.
Who holds this loan is critical. Mortgages are often sold and packaged into securities, and securities investors collect payments from a pool of borrowers. Therefore, the agency that issued your mortgage may not necessarily be the one that bears the risk of future investments.