Record Mortgage Refinancing - The Next Sound You Hear May Be "Pop!"

Cash-out refis are now a whopping 36% of total mortgage applications. When this last happened, in 2008, an epic financial catastrophe ensued.

Housing bubble

Housing bubble

From Birch Gold Group

With average incomes in the U.S. generally remaining flat, simple math says when mortgage rates get high enough, the market will have to correct.

And as rates go up, you might also expect mortgage refinancing activity to go down. But it isn't, it's going up fast, which means homes are turning into ATMs again (see chart).

Cash out share of refis chart

Believe it or not, cash-out refis now represent a whopping 36% of total mortgage applications.

And borrowers are not refinancing to get a "lower rate," but instead to get cash out from the equity in their home to pay for living expenses and to pay down higher interest consumer debt.

They may claim they're making home improvements, but many simply need the money to maintain their current lifestyle.

The last time this happened, in 2008, an epic financial catastrophe, related bailouts, and a host of broken promises all happened.

Fast forward to 2018, and it appears as though a new housing bubble is forming and we're getting set to repeat history...

Put 2008 into a copy machine and hit "Housing Bubble"

Mortgage rates may still be near 30-year lows, but they're on a fast rise towards 6%. They're currently sitting at 4.86% according to the Mortgage Bankers Association.

That's the highest rate since 2011. But once the 30-year rate gets over 6%, combined with surging home prices, homeowners budgets will be squeezed even tighter than in 2008.

Then, homeowners are likely to start making the kind of decisions that can force a housing bubble to pop.

Home prices might be temporarily propped up by buyers trying to close deals before mortgage payments get too expensive. But then home prices could crash even harder if this leads more homeowners to foreclose on homes they can't afford.

Hear those echoes from housing crisis from 2008 to 2011? This a CNN headline from the last time this was happening…

Foreclosures up a record 81% in 2008

There were over 3 million foreclosures filed in 2008 alone. That same crisis caused home prices to plummet 21% in the same year.

And that was just one year. The housing crisis continued into 2011.

In 2018, the banks are worse off than last time

If another housing bubble does implode, recovering from that crisis might be challenging. One reason has to do with banks that are unprepared.

Similar to 2008, the number of banks on a FDIC "problem bank list" with a large number of assets is making a jump:

Bank on the Problem Bank List chart

In addition, the FDIC is hinting at the possibility of managing a catastrophic situation it calls "disruption," as reported in a Wolf Street piece:

[A]n extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield. This has led to heightened exposure to interest-rate risk, liquidity risk, and credit risk.

In addition, with the current expansion in its latter stage, the industry needs to be prepared to manage the inevitable downturn, whenever it may occur, in order to avoid financial system disruption and sustain lending through the economic cycle.

Wolf described what "disruption" meant earlier in the piece…

"Undue disruption" would be when banks stop lending. That's when credit freezes up in a credit-dependent economy. Everything comes to a halt. Paychecks start bouncing.

Translation: This is what we don't want to happen, especially during a housing crisis. But it sure seems to be getting ready to happen.

And this time bailouts, Quantitative Easing, and other remedies economists tried between 2008 and 2012 to ease a mortgage crisis might not work as well, if at all.

Bottom line is that banks are unprepared and buried in lawsuits.

Consumers are buried in non-mortgage debt.

Corporations will simply make every effort to shift the risk elsewhere.

When the housing bubble goes "Pop!" make sure your portfolio doesn't

These are interesting times indeed. The impending housing bubble, and a looming market correction will both reveal just how similar the "script" is to 2008.

Until then, you may want to start hedging your bets.

Find an asset that is known to be a source of protection during times of economic disruption, such as gold and other precious metals. There may never be a better time to protect your wealth than right now.

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