Could financial market strain cause a major crash?
Prominent figures are beginning to sound the alarm about possible strain in the US financial system after a subprime auto lender’s collapse stirred fears that further failures could be on the way.
The implosion of Texas-based auto lender Tricolor and auto parts firm First Brands saw JPMorgan chief executive officer Jamie Dimon, a perceptive analyst of market matters, warn of other potential “cockroaches” in the lending space.
And Bank of England governor Andrew Bailey said this week he sees disturbing similarities between those breakdowns and the conditions that triggered the 2007-08 global financial crisis – not least in some of the ways lenders are structuring debt.
“I don’t want to sound too foreboding,” Bailey said. “But the added reason this question is important is if you go back to before the financial crisis when we were having this debate about subprime mortgages in the US, people were telling us: ‘No, it’s too small to be systemic. It’s idiosyncratic.’ That was the wrong call.
“We certainly are beginning to see… what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis and during it, alarm bells start going off at that point.”
Few financial market watchers need to be reminded of the potentially catastrophic impact to the housing and mortgage sectors of possible hidden rot on lenders’ books.
The US housing market came tumbling down like a house of cards in 2008 when mortgage defaults began to climb, triggering a meltdown of mortgage-backed securities and ultimately pushing many huge financial institutions with massive leverage into crisis.
No sign of shock among lending giants
Dimon’s comments last week suggested there could be more Tricolors about to happen. “When you see one cockroach, there are probably more,” he said.
Major lenders – including JPMorgan and Barclays – have thoroughly reviewed their portfolios after the Tricolor bankruptcy, having taken losses on the collapse.
But for now, few are suggesting a market crash resembling the one seen in 2008 is imminent – and while the economy isn’t exactly firing on all cylinders, the US’s top financial institutions appear to be in rude good health.
That’s despite continuing uncertainty about the impact the Trump administration’s tariff wave could have on economic growth and trade across a range of sectors.
Morgan Stanley and Bank of America both saw stocks soar last week amid steady wealth and mortgage business growth, while investment banking also rebounded.
Shilpa Mishra, managing director at MNP Corporate Finance in Toronto, said US banks appear to be managing the tariff disruption without major strain.
“If you look at the third-quarter results for Canadian banks, they delivered much better than expected results,” she told Mortgage Professional America, “and as we look at the US, it’s a similar story.
“JP Morgan, Goldman Sachs, Wells Fargo – all of them beat profit expectations. Overall, Canada’s banks are navigating volatility well, and so are the US banks.”
What the recent uncertainty means for mortgage rates
The 10-year Treasury yield, a key driver of 30-year fixed mortgage rates in the US, has slipped over the past month amid lingering unease about the future of the economy.
That measure fell as low as 3.936% on Wednesday, compared with 4.187% on September 26 – and nearly 50 basis points below its level at the end of July.
United States mortgage applications edged down for the fourth straight week, even as falling rates spurred a notable jump in refinancing, according to the latest data from the Mortgage Bankers Association (MBA).https://t.co/kie6gaJVoF
— Mortgage Professional America Magazine (@MPAMagazineUS) October 22, 2025
But while the Federal Reserve is expected to cut interest rates in the months ahead, some market watchers aren’t so sure. And while mortgage rates don't directly follow Fed decisions, a jump in the Fed's funds rate could put upward pressure on borrowing costs.
Larry Summers, who served as President Clinton’s treasury secretary and director of the National Economic Council under President Obama, sees more chance of rates climbing – because government debt is continuing to skyrocket
Speaking at the Mortgage Bankers Association (MBA) annual conference in Las Vegas this week, he described the Fed as “inertial” in its judgment of where its neutral funds rate should be and said rates were “considerably more likely to rise than fall from here.”
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