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It's Official: The Mortgage Market Is in Free Fall

It's hard to believe, but the mortgage market is in worse shape today than it was in 2008 following the collapse of Lehman Brothers. Data released this morning from the nation's two largest mortgage originators -- Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) -- show a market in free fall.

The numbers speak for themselves. In the three months ended March 31, mortgage originations fell by 67% at Wells Fargo compared to the same period last year. At JPMorgan Chase, they dropped by 68%. The performance was worse for both banks than even in the darkest days of the financial crisis.

The most immediate explanation for the drop boils down to interest rates. Since the Federal Reserve started hinting that it would taper its monthly purchases of mortgage-backed securities, which it's since done, borrowing costs have shot up dramatically, going from less than 3.4% on a 30-year fixed-rate mortgage two years ago up to roughly 4.4% today.

The net result has been to throttle the demand for mortgages. As you can see in the chart below, data from the Mortgage Bankers Association shows that mortgage application volume for the industry overall is at the lowest point in well over a decade.

Added to this is the uncertainty surrounding the legal and regulatory aspects of the mortgage market. "Originators are being more conservative because making loans that may default has become far more risky and costly," JPMorgan CEO Jamie Dimon wrote in his annual letter to shareholders released this week.

Finally, it can't be denied that the health of the American consumer, while improving, leaves much to be desired. As Federal Reserve Chairwoman Janet Yellen pointed out last month, an estimated 7 million part-time workers would like full-time employment and an "extraordinarily large share" of the unemployed population has been out of work for at least six months.

It probably goes without saying, but this is an ominous sign for the housing market, and particularly because we're on the eve of the spring selling season. Will this change the dynamics of the housing market, usurping power from home sellers? That remains to be seen, but one thing's for sure: If the ongoing recovery is going to continue, the housing market must be an active participant.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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