Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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How the run on banks is affecting the mortgage market

Banks with significant roles in the housing industry are hit by deposit run. Meanwhile, mortgage rates are declining

Following the collapse of Silicon Valley Bank last week, the biggest bank failure since Washington Mutual in 2008, two other American banks with significant roles in the housing industry were hit by a deposit run. Signature Bank closed its doors on Sunday, the same day First Republic Bank announced fresh access to capital to fund operations.

California-based First Republic Bank, the 14th-largest U.S. mortgage lender in 2022, said it enhanced its financial position by accessing additional borrowing capacity from the Federal Reserve Bank and JPMorgan Chase & Co. In total, the bank stated it has $70 billion available in unused liquidity to fund operations, excluding the Fed’s Bank Term Funding Program. 

“First Republic continues to fund loans, process transactions and fully serve the needs of clients,” Jim Herbert, founder and executive chairman, and Mike Roffler, CEO and president of First Republic Bank, wrote in a statement. “First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks.”

Founded in 1985, First Republic offers private banking, private business banking and private wealth management. Its consumer deposits have an average account size of less than $200,000, compared to the standard insurance amount by the Federal Deposit Insurance Corporation of $250,000. The bank said that business deposits’ average account size is less than $500,000.

According to the bank, no single sector in the U.S. economy represents more than 9% of total deposits, with the largest being diversified real estate

In the mortgage space, First Republic originated $31.8 billion in 2022, 8% higher than the previous year, according to Inside Mortgage Finance. The bank’s production is virtually entirely from jumbo loans. First Republic is the fourth-largest non-agency jumbo lender in America, per IMF. 

Signature Bank closes doors

At Signature, a New York-based large multifamily lender that disastrously bet big on crypto, deposits have been in free fall since the fourth quarter of 2022. “The arduous rate environment, along with challenges in the digital asset space, led to deposit declines,” said Joseph DePaolo, president and CEO, in an earnings news release. “We overcame with little difficulty, given our robust liquidity position,” he added. 

Amid the SVB debacle, the bank stated on Wednesday that it had a “diversified deposit mix, with more than 80% of deposits coming from middle market businesses, such as law firms, accounting practices, healthcare companies, manufacturing companies and real estate management firms.” Total commercial real estate consisted of 44% of the $74.3 billion loan portfolio at the end of 2022. 

As of Wednesday, the bank stated it had $4.54 billion in cash, borrowing balances of $6.8 billion, and an additional borrowing capacity of $29 billion. 

But in a joint statement on Sunday, secretary of the U.S. Department of Treasury Janet Yellen, Federal Reserve chairman Jerome Powell and FDIC chairman Martin J. Gruenberg said Signature Bank was closed by the New York state chartering authority after more than two decades operating, citing “a similar systemic risk exception.”  

“All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the statement said. “Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed.” 

Domino effect 

Despite its efforts to enhance liquidity amid the turbulence, regional banks’ stocks are suffering. Investors fearing withdrawal requests may pressure these banks’ balance sheets – as happened at SVB and Signature – are selling their stocks. 

First Republic’s share is trading at $29.43 on Monday around noon EST, down 64% compared to the previous closing. Other regional banks were also trading down, such as Western Alliance (-67%), PacWest Bancorp (-29%) and Zions Bancorporation (-27%). 

“More banks will likely fail despite the intervention, but we now have a clear roadmap for how the gov’t will manage them,” Bill Ackman, Pershing Square’s founder, said in a social media post on the federal government intervention at SVB. According to Ackman, bank boards and management “have received a massive wake up call.” 

Investors running from riskier assets are buying bonds, causing mortgage rates to fall. After reaching the 7% mark in early February, the 30-year fixed-rate conventional mortgage is trading at 6.57% on Monday morning, according to Mortgage News Daily

Rates are down also due to the expectation that the Fed may stop its federal funds rate hikes in its meeting scheduled for next week. Monetary policy observers had previously forecasted a 50 basis point increase. 

“We think that Fed officials will worry that another interest rate hike could be counterproductive to efforts by US policymakers to shore up the financial system,” wrote a team of analysts at Goldman Sachs.

“It will be hard to be completely confident in the near term that Sunday’s intervention will halt the pressure on smaller banks, who play a large macroeconomic role and could become considerably more conservative in their lending,” they added.  

Declining rates could be a relief to mortgage lenders, but the truth is the landscape is unstable. 

“SVB and Signature created a minefield where regulators, investors and warehouse lenders’ perception of risk has been materially heightened,”James Deitch, founder of Teraverde Management Advisors LLC, said in a social media post. According to Deitch, after these banks’ failures “out of the blue,” IMBs may expect independent auditors to be very probing and skeptical.

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