Banking System Instability May Prove Catalyst for Recession


Ongoing banking instability may affect the availability of jumbo mortgages, according to a new report from Fannie Mae’s Economic and Strategic Research (ESR) Group

Recent events may act as the catalyst that tips an already precarious economy into recession, primarily via the combination of tighter lending standards among small and midsized regional banks and weakened business and consumer confidence.

While home sales experienced a large bump in February following a pullback in mortgage rates, recent mortgage application data suggest that last month’s level of home sales will be temporary, according to the report. Additionally, ongoing banking instability may affect the availability of jumbo mortgages and residential construction loans due to the high concentration of those originations stemming from small and mid-sized banks. 

Home sales to remain subdued due to ongoing affordability constraints and the “lock-in effect” continuing to create a strong financial disincentive for homeowners to move, says the report.

“Inflation has now been joined by financial stability concerns as threats to sustained growth,” says Doug Duncan, senior vice president and chief economist, Fannie Mae. “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.”

Read the report here.

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