So far, this regional banking conundrum created a brief but consequential crack in the ascent to 7% mortgages.
By JEFF LAZERSON | firstname.lastname@example.org | MortgageGrader.com | March 27, 2023
Article originally posted in Orange County Register on March 16, 2023.
When Silicon Valley Bank and Signature Bank were shut down by the Feds within 48 hours of each other, no quicker than a banking regulator could say “give me your keys,” the bond market rallied, and mortgage rates dropped about a quarter point.
Now, we’re left to wonder what will come of the mortgage industry if this bank contagion expands. Will mortgage rates plummet, perhaps back to the go-go days of two short years ago? Will the economy contract as the troubled banks cut off credit and claw back lines of credit for commercial businesses?
Keep in mind, SVB bondholders and shareholders are unprotected — only the depositors are protected.
My prediction: If the scene worsens, home prices will likely drop but not too far. With limited inventory on hand, demand, to some degree, should buoy supply.
So far, this regional banking conundrum created a brief but consequential crack in the ascent to 7% mortgages. This week the Freddie Mac 30-year fixed rate declined to 6.6%.
“The most immediate impact of the two bank failures triggered a sharp increase in bond/Treasury investments, which brought down Treasury and mortgage rates in the short-term,” said Guy Cecala, CEO and publisher of Inside Mortgage Finance. “Going forward it remains to be seen if rates will drift higher or lower. A lot may depend on what the Fed does with rates in the next week or so.”
Regulators should be acknowledged for taking quick action, stemming any broader runs for deposits. Instead, the feds gave banks lines of credit and upped deposit insurance guarantees above $250,000.
It’s also important to note that regional banks are small, with assets between $10 billion and $100 billion, according to the Board of Governors of the Federal Reserve. And they’re an even smaller player in the mortgage marketplace.
For example, the top 100 mortgage lenders funded a combined $413.63 billion in mortgages in the third quarter of 2022. Of that total, regional banks funded just $12.04 billion or 0.029%, according to Inside Mortgage Finance.
What we know right now is that inflation and consumer prices are still high, despite a recent softening to 6% in the U.S. That, combined with these new bank failures, likely will keep the Federal Reserve from hiking its benchmark rates significantly at its meeting March 21-22.
“So far, the Treasury and the Fed have contained this (Silicon Valley Bank and Signature Bank),” said Raymond Sfeir, director of Anderson Center for Economic Research at Chapman University. “The inflation rate is still the main issue.”
Sfeir sees the Fed likely raising short-term mortgage rates by a quarter point when it meets March 21-22. But for the two banks being taken over, Sfeir thought the Fed would have raised half a point.
Finding consensus in the mortgage arena was tough this week, with some saying the bank failures likely would have minimal effect on the housing market. Others weren’t so quick to agree. Here’s what they had to say …
“I don’t think the SVB failure will impact mortgage rates, the housing market, and the broader economy for very long,” said Mark Zandi, chief economist at Moody’s Analytics. “I suspect the Fed will pause its rate hikes at the upcoming meeting, given the uncertainties, but resume its rate hikes at the May meeting.”
“The mini-bank crisis could encourage mortgage borrowers to look more favorably on non-banks (non-depository banks) as a source of funding, but that is just speculation at this point,” said Guy Cecala, CEO and publisher of Inside Mortgage Finance. “Generally, borrowers shop for mortgages based on interest rates and not whether they are a bank or nonbank.”
Richard K. Green, director of the Lusk Center for Real Estate, is sounding a very different alarm bell. Too many banks, not just regional banks, Green said, invested in 10-year Treasuries offering a 2% yield and mortgage-backed securities at a 2.5% yield when mortgage rates were dirt cheap. But now they are paying (out) 4-5% interest.
Depositors chasing high yields are called “hot money depositors” according to Dave Stevens, retired CEO of the Mortgage Bankers Association.
If banks don’t have the funds to pay out to folks (in a run on the bank) then they may have to sell assets to make good.
If you sell the bonds and mortgage-backed securities, “you get 80% of what you paid for them,” Green said. “If you are a bank and you have a lot of long-term assets, you’re screwed. It’s not confined to a very small number. I don’t know how large a problem this is.”
Is this a bank deposit epiphany?
How many 5-year, 7-year and 10-year jumbo rate bank portfolio mortgages did we, originators across America, write between 2019 and 2021 with rates in the 3s or perhaps less? The banks used depositor funds for which they were paying zero or near zero interest. Certainly, it was as good a deal for the banks as for the mortgage borrowers at the time.
“If the Fed continues to raise interest rates, it will make things worse,” Green said. “A banking crisis is a far worse outcome than more inflation.”
Sleep on that quandary tonight, Federal Reserve Chairman Powell.
Freddie Mac rate news: The 30-year fixed rate averaged 6.6%, 13 basis points lower than last week. The 15-year fixed rate averaged 5.9%, 5 basis points lower than last week.
The Mortgage Bankers Association reported a 6.5% mortgage application increase from last week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,104 less than this week’s payment of $3,534.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.25%, a 30-year conventional at 5.875%, a 15-year conventional high balance at 5.875% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.5% and a jumbo 30-year fixed at 6.25%.
Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year VA fixed-rate at 5.375% with 1 point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011