The market is a bit crazy post the Silicon Valley Bank disaster on Friday and Signature Bank collapse over the weekend. I want to take this opportunity to explain what happened and what it means to you, the consumer and potential homebuyer.
Overview of What Happened
All banks are required to hold an amount of liquid assets to cover their customers’ funds for withdrawal. This is referred to as liquidity coverage. To meet their liquidity coverage ratio *as required by law”, Silicon Valley Bank executives chose to combine short term liquid deposits with long term assets, whose value had declined (on paper) significantly because the US Federal Reserve has raised rates significantly over the recent months. When the bank needed the liquidity to meet demand from depositors removing funds on Thursday, they couldn’t sell the long-term assets for what they needed to cover their liquidity needs…so the FDIC moved in and shut the bank down and took over.
FDIC insures bank depositors up to $250,000 only – this insurance covered only 7% of the depositor accounts. Silicon Valley Bank had $209 Billion in total assets as of 12/31/2022. This will be considered the second largest bank to fail since Washington Mutual in 2008 at $307 Billion.
*banks must hold an amount of high-quality liquid assets that's enough to fund cash outflows (customer withdrawals) for 30 days.
So what does that mean to the market? To our mortgage interest rate environment? To future interest rate hikes? Most importantly, what does it mean to YOU?
#1 - Expect to see a rally in the purchase of bonds which translates to a lowering of mortgage rates this morning. There will be A LOT of volatility for a period of time but rates should continue to lower.
There will be, what is considered a “flight to quality investments or safety” with investors increasing their buying interest in the bond market which is considered more stable. With the increased buying of bonds, comes lower mortgage rates.
#2 - The likelihood that the US Federal Reserve will NOT raise short term interest rates again at their next meeting has increased .
The Federal Reserve has been raising short term interest rates over the last several months by over 3.5%. This affects your credit card rates, car loans, lines of credit, etc. I am sure you have seen this increase in your credit card payments. Why - The Fed tightens rates to control inflation (spending) and does so until “something breaks” which is usually the economic indicators of a recession. In our case today, a couple of bank failures, as we’ve seen should qualify as the break. My view is that this is an initial indication that the Fed has gone far enough with their tightening stance…or, more likely, a little too far.
#3 - Bank failures often have ripple effect so hold on to your hats.
This isn’t just a problem for Silicon Valley Bank. If you look at the root causes, this bank is not alone. This failure is exposing a systematic problem caused with the Dodd Frank rules that created issues with assets and the valuation for liquidity purposes.
#4 - Affordability just got better for buyers.
Not only will lower mortgage rates increase buying power, the concern around the financial industry and/or concerns about what that could mean in the overall economy could cause sellers to get more aggressive in their pricing to sell now rather than wait until later which will increase the inventory of homes and enhance negotiations.
Final Thoughts
The final “take away” from all of this banking news is – Don’t Stress – Mortgages are becoming more affordable and the inventory of homes on the market should increase, giving you better choices.
If your goal is to purchase a home – you should get pre-approved so you know how much you can afford, ask questions about the available down payment assistance programs in your area, and compare your options.
Homeownership has just become achievable in the very near future.
ABOUT THE AUTHOR
Toni F. Ryan | NMLS#230507
Senior Loan Consultant
Peak Residential Lending
Toni F. Ryan has over 20 years experience in mortgage lending - both on the wholesale and retail levels. She believes that education is key to making the best decision for YOU! She shares her insight into the lending world here and encourages your feedback. Don't forget to connect on Facebook!
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