“What’s good for General Motors is good for America!”
That is a slight bastardization of a quote famously uttered by GM’s CEO in 1953 – and he was largely right.
What is ironic, though, is that the opposite is true for the mortgage industry (and for real estate).
This is because what is bad for America often leads to lower rates, which helps mortgages and real estate.
And what is really bad for America can be really good for mortgages.
COVID is a great example. The entire country shut down, and millions of people and businesses suffered horribly, while the mortgage industry enjoyed record volumes and profits with sub-4% mortgage rates.
Stock market crashes, bank failures, recessions, and increases in unemployment all result in lower rates.
So, we can now all look forward to some really bad news that most people are oblivious to – the private credit crash. Woohoo indeed!
SIDEBAR #1: Mortgage rates hit their highest level of the year. The reason is again rising oil prices (portending inflation), as the shipping lanes near Iran are still deemed unsafe.
SIDEBAR #2: Thank God for tighter spreads! The average mortgage rate today is still only 6.29% (per Mortgage News Daily). In 2024, when the 10 Year Treasury was where it is today, mortgage rates were close to 7.0%.
SIDEBAR #3: OMG, the housing market’s frozen…except compared to last year… There were several “crash bros” running up and down my street naked this morning, gleefully screaming “the crash is coming! the crash is coming” before being put in straight jackets and taken to a home. They were mumbling something about record-low sales and demand, while spittle drained from the corners of their mouths. But Logan Mohtashami shut them down again by reminding us that both purchase applications and pending home sales are higher this year than in 2025 – and somehow we survived 2025.
What Is Private Credit?
In the olden days (pre-2010), when companies wanted to borrow money, they could go to the bond market or to commercial banks for loans. Post-2008 regulations, though, made that more difficult, so an alternative avenue emerged in which “non-banks” or private funds like Apollo or Blackstone began to offer loans to companies at scale.
What makes it so risky is this:
- Private funds are not as good as banks are at assessing credit risk – and they take more risk in general.
- There is little regulation or public disclosure – so investors in the funds making the loans can’t assess risk.
- The loans themselves are riskier – and the market is illiquid (it is very hard to sell off bad debt).
- Risky loans are now defaulting left and right – and this, in turn, is putting commercial banks (the lifeblood of our financial system) at risk because they loaned money to the private funds.
- The market is huge – close to $2 trillion (bigger than the 2008 subprime market) – and a collapse could have severe repercussions in the economy.
Reasons to Fear This More Than the 9,000 Other Financial Crisis Predictions:
- Staid analysts (rather than screaming crash bros) like Chris Whalen and Ed Dowd are sounding the alarm – and making a very strong case for how serious this is.
- It is already happening, as companies are defaulting in large numbers and private lenders are shutting down investor withdrawals.
- This is hitting in conjunction with other risks like an AI bubble pop or an even sharper oil price increase.
- The market is private and opaque, so it is difficult to assess the extent of the risk – and mass defaults could foster a banking crisis (b/c banks lend to private funds) and a domino effect in the financial markets.
Anyway, an escalation of the private credit crisis could crash markets, foster a banking crisis, start a recession, and usher in mass unemployment.
But at least rates will fall… as investors everywhere will move cash from the stock market to the “safety” of the bond market.
