Commercial mortgages could be on brink of collapse: Real estate investor Tom Barrack

Lawmakers are working to reach an agreement on a massive stimulus package to combat the economic impact of coronavirus. Real estate investor Tom Barrack, Colony Capital chairman and CEO, is warning commercial mortgages are on the brink of collapse and that we are seeing the beginning of “a second crisis that will occur in the financial markets” if immediate action is not taken by Congress. He joins “Squawk Box” to discuss.

An increase in interest rates, combined with a massive shutdown of the economy caused homeowners and potential homebuyers to back away from the mortgage market.

Total mortgage application volume fell 29.4% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) increased to 3.82% from 3.74%, with points decreasing to 0.35 from 0.37 (including the origination fee) for loans with a 20% down payment. That is the highest level since mid-January.

“Several factors pushed rates higher, including increased secondary market volatility, lenders grappling with capacity issues and backlogs in their pipelines, and remote work staffing challenges,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Applications to refinance a home loan, which had been surging dramatically in the last month, fell 34% for the week but were still 195% higher than a year ago, when rates were 63 basis points higher. Refinances tend to be volatile, moving weekly with interest rates.

Mortgage applications to purchase a home are usually less volatile and less sensitive to weekly rate moves. Those applications decreased an unusually wide 15% for the week to the lowest level since August and were 11% lower annually. Buyers are clearly rattled by the economic shutdown, job layoffs and the massive drop in the stock market.

“Potential homebuyers might continue to hold off on buying until there is a slowdown in the spread of the coronavirus and more clarity on the economic outlook,” Kan said.

Purchase applications fell even more dramatically last week in states hardest hit by the coronavirus: down 35% in New York, 23% in California and 17% in Washington.

Mortgage rates have already pulled back this week, as the Federal Reserve is now pouring money into the mortgage-backed securities market to restore liquidity.

Lower rates, however, are unlikely to cause any surge in homebuying. Real estate agents and homebuilders are reporting a big drop in demand, and open houses are shuttered. They are doing virtual home tours, but sales are predicted to drop dramatically for the next few months.

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