March came like a tiger for the banking industry with a trio of bank failures including the country’s 16th biggest bank, Silicon Valley Bank (SVB), with assets of $212 billion.
Thank you for reading this post, don't forget to subscribe!Other banks that relaxed in early March were crypto-friendly lenders Silvergate Capital Corp. ($11.4 billion in assets) and signature bank ($110 billion in assets). Bank failures triggered panic in markets globally and a flight to safe-haven investments such as US Treasuries, which has helped fuel the recent sharp decline in interest rates.
The impact of the failures is still being assessed by the markets. experts we spoke to housing wire The banking-industry crisis points out that it’s too early to know how everything will shake out. For now, though, they say lenders in the nearterm mortgage banking market should take some prudent steps to hedge against the worst of downside risk — zeroing in on bank-sponsored warehouse lines used by independent mortgage banks (IMBs). Doing.
Among the commonalities for all three failed banks were a concentration of customers in a narrow industry segment – crypto-focused for Silvergate and Signature and tech-focused for SVB – and a high volume of “hot deposits” that would fly in search of cash. Was prone to Best return on their money.
For SVB, the most significant bank failure of the three – and the largest since 2008 and Washington Mutual Its customer concentration and short-term deposit exposure were set against a long-term investment portfolio that was surrounded by a doubling of interest rates through 2022 in the wake of the Federal Reserve’s monetary tightening policies.
“I’m having trouble understanding how this can happen, that you’re taking a lot of short-term deposits and making a lot of long-term investments,” said Community Home Lenders Association (CHLA) executive director Scott Olson during a webinar this week focused on assessing the SVB failure and its consequences. CHLA serves small and medium-sized independent mortgage banks.
“I’m sure it was a good idea at the time,” Olson said, “but how many times do we have to see it before we learn it’s a very risky strategy.”
In fact, the rate environment that fueled the liquidity crunch in SVBs has also wreaked havoc on bank bond portfolios in general.
“As a result of higher interest rates, long-term maturity assets acquired by banks when interest rates were low are now worth less than their face value,” said Martin Gruenberg, president. Federal Insurance Deposit Corp., In a recent speech at the (FDIC) international bankers institute, “The result is that most banks have some degree of unrealized losses on the securities.
“The aggregate amount of these unrealized losses, including securities available for sale or held to maturity, was approximately $620 billion at the end of 2022. Unrealized losses on securities have meaningfully reduced the banking industry’s reported equity capital.”
As of December 31, 2022, SVB had a total securities-investment portfolio of $120.1 billion, including more than $16 billion in Treasury securities and some $64 billion in mortgage-backed securities issued by the agency, according to bank filings US Securities and Exchange Commission, Most MBS portfolios consist of mortgages originated before the Fed-induced rate run-up, when 30-year fixed mortgage rates were 3% or less, versus now, when they are more than double that mark.
The bulk of SVB’s investment portfolio, approximately $91.3 billion, including $57.7 billion in MBS, is marked as “held to maturity”. According to SEC filings, the remainder of the SVB portfolio ($26.1 billion) was listed as “available for sale” (AFS). The bank listed some $2.7 billion in non-marketable equity securities.
In early March, the bank sold approximately $21 billion of its AFS portfolio, recording a loss of $1.8 billion due to the volatile rate environment. The bond sales were needed to offset a massive exodus of deposits in 2022 as the tech industry faltered, creating liquidity problems for the lender.
In the wake of that bond-sale loss, SVB announced it would seek to raise capital to recoup its equity, which spooked markets given the fundraising plan. The bank’s customers, already experiencing a downturn in its high-flying industry, were also concerned about the risk of SVB’s precarious finances—which led to a social media-amplified run on the bank and subsequent collapse.
“They [SVB] There was an excessive concentration risk in the tech space [in terms of customers]said Brian Hale, founder and CEO of the consulting firm mortgage advisory partners, “And they completely mismanaged, in my opinion, the period risk [of their investment portfolio],
“When you have long term assets [MBS] which are funded from short-term deposits, if the deposits start getting revalued [upward, and you’ve locked in your asset yield [too low] because your deposit cost was [low at the time]When those short term deposits are revalued [higher]That is the definition of arbitration.”
IMBs do not face the challenge of intermediation as they do not deal with deposits or maintain long-term investment portfolios. However, they use a bank warehouse line of credit to help with the mortgage,
“It’s totally a long borrowing short term problem for these guys [SVB ] CEO Dave Stevens said, included himself in Mountain Lake Consulting and former President and CEO mortgage bankers association, who also told about the failure of SVB during the recent webinar. “IMBs do not carry much risk. They are primarily pass-through institutions… with an outstanding pipeline of loans that are locked in until they are closed and sold.
warehouse lines
However, Stevens said the bigger danger with the recent bank failures is the potential for a “contagion” effect.
“How do you rule out its potential spread to other banks around the country that are behaving similarly?” He asked. “That’s the other shoe to drop.
“For IMB, you need to think about where your warehouse lines are, and there are enough diversified options for warehouse lines, should one of the banks be potentially at risk?”
Stevens stressed that, in his opinion, the recent bank failures are unlikely to have a contagion effect. He estimated that there are no more than a dozen banks nationwide that have “long, underwater investments in the Treasury markets and the mortgage-backed securities (MBS) market.”
Rob Nunziata, Co-CEO of Independent Mortgage Lender fbc mortgageSaid FBC works with a number of warehouse lenders, including small and large Texas Capital Bank, western alliance, Bank of America And Veritex Community Bank,
“I have spoken to all our warehouse lenders,” he said. “They’ve all said with the same thought, ‘It’s business as usual.’
“What they’re seeing is that this is a very regional situation [with the bank failures], … Basically, they’re saying they have strong balance sheets and don’t anticipate anything changing … based on what’s happening currently.
Nunziata said the optimistic outlook on warehouse lenders could change in the future, of course, “but so far, it’s really been the same message from all the warehouse banks we work with.”
Nunziata’s assessment of the warehouse-lending space is echoed in a recent posting from Texas Capital Bank LinkedIn page, which states the following:
“We built Texas Capital Bank with a purpose to operate from a position of financial strength and stability and to serve our customers through market and rate driven cycles. Thanks to our actions in 2021 and 2022, we have Leading balance-sheet strength, with 18% of our total assets in cash and 30% in liquid assets, with 13% common equity Tier 1 capitalization. Each of these metrics ranks us among the best in the United States compared to the largest US firms. Keeps in capitalized banks.
Still, CHLA President Taylor Storck, who is also the chief operating officer Developer’s Mortgage Company, said that IMB should be in close communication with its warehouse lenders at this point in time. Storck spoke during the same webinar that Stevens and Olsson participated in this week.
“Right now in the warehouse space, every IMB operator needs to have a very open honest two-way conversation with their warehouse provider over the phone,” he said. “Here I am. Here is my cash position. Here is my liquidity position. what is yours how do you look? How do we make sure we work well together?”
Fear of Bank Failure and Margin Call
The 2-year Treasury yield posted its biggest decline since the stock market crash of 1987 on Monday, March 13, although it recovered slightly on Tuesday. Similarly, the 10-year Treasury made some comeback on Tuesday after hitting a five-week low of 3.51% on Monday.
The sudden rate drop in recent days prompted both Davis and Hale to raise the possibility of mortgage banks being hit by potential margin calls.
“You’ll remember in March and early April of 2020 [the pandemic]rates dropped precipitously,” Hale said. “Well, a lot of mortgage companies got caught.
“I hope the industry has learned from this to some extent, but I spoke to some people today who are concerned about margin calls around interest rate changes.”
Stevens added during the SVB-focused webinar: “I think anybody who’s hedging a pipeline at this point in time knows they’re going to get margin calls. I think it’s a given unless That the bond market doesn’t come back, which I don’t think is going to happen any time soon.
John Twohig, Head of Whole-Loan Trading raymond jamesSaid that if there was margin-call congestion, he didn’t see signs of it on his trading desk until Monday, March 13.
“I had a lot of buyers calling me, more down-feeders, saying they were available and looking for an opportunistic [asset] pool, but I didn’t have any sellers calling me looking to get out,” Twohig said. “I haven’t seen a forced seller [a sign of margin calls]So if it did happen, I didn’t have a vision of it, but that’s not to say what other desks or vendors experienced.
Spencer Kalik, a partner focused on real estate transactions and land-use eligibility at the law firm allen matkins, said he remains optimistic about the long-term outlook for the real estate market and the US economy. Assuming he’s right, then maybe March for the mortgage industry will turn out to be lambs. We’ll all have to ride it and see.
When it comes to people’s “common sense,” however, Kalik is less optimistic, saying that it sometimes seems to be in short supply.
He said, “I think sometimes in this very high-stakes, fast-paced world, some common sense goes out the window, and some best practices go out the window.” “It was like here [with SVB’s failure]On the bank side, but also on the borrower side, and on the trading side of things.
“But I don’t think it [the fallout from the recent bank failure] That’s going to spread like wildfire for two reasons: one, because I think it’s a case of too many banks failing that are too concentrated in one area, and I think most banks are far more diversified. I also think the other thing, quite frankly, is that the Biden administration [via its recent expansion of liquidity options for banks and its action to make whole all depositors at SVB and Signature Bank] There has been a strong desire to step in and ensure that this does not happen again.”
