Mortgage lenders, borrowers react to banks closures
The Silicon Valley Bank and Signature Bank failures that occurred over the last week have caused even more uncertainty within the mortgage industry. Still, homebuyers took advantage of declining rates provoked by the turbulence and applied for home loans. Meanwhile, mortgage lenders are still trying to calm down their investors and business partners.
The recent crisis impacted homebuyers in different ways. A potential pause on the Federal Reserve’s federal funds rate hikes may bring borrowers on the sidelines back to the market, as mortgage rates could fall even further. However, the turbulence can harm consumer confidence to commit to new home loans.
“Consumer confidence is always a very necessary part of buying a house, and certainly reading the news about potential lack of access to deposits that customers have with these two banks, people may worry about that,” James Deitch, founder of Teraverde Management Advisors LLC, said. “But I’m not sure the consumer will hold off on purchasing a house simply because of the turbulence they may see in Silicon Valley and Signature.”
The latest Mortgage Bankers Association (MBA) survey proved Deitch right. The data shows that the mortgage composite index, a mortgage loan application volume measure, increased 6.5% for the week ending Jan. 10 compared to the prior week. The refinance index increased 5% in the same period, and the seasonally adjusted purchase index rose 7%.
The survey, conducted weekly since 1990, covers 75% of all U.S. retail residential mortgage applications.
“Treasury yields declined late last week, as market concerns over bank closures and the potential for broader ripple effects triggered a flight to safety in Treasury bonds,” Joel Kan, MBA’s vice president and deputy chief economist, said in a statement. “While lower rates should buoy housing demand, the financial market volatility may cause buyers to pause their decisions.”
The MBA survey shows that the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) was 6.71% last week, down from the previous week’s 6.79%. Rates for jumbo loan balances (greater than $726,200) went from 6.49% to 6.39% in the same period.
Silicon Valley Bank collapsed last week after it lacked the liquidity to pay for clients’ withdrawals. It was the biggest bank failure since Washington Mutual collapsed in 2008. The SVB failure was followed by Signature Bank, which closed its doors on Sunday. Citing systemic risks, regulators approved depositors’ access to all their money and additional funding for banks on Sunday.
“The Treasury did make the correct decision to stabilize the market by ensuring that depositors had access to their funds. Depositors did nothing wrong; they should have access to their funds. That was a favorable development,” Deitch said.
Calming the market
With many storm clouds on the horizon, the two top U.S. lenders, Rocket Companies and United Wholesale Mortgage, announced that they don’t hold cash deposits or securities at Silicon Valley and Signature and have no business relationship or direct exposure to the banks.
Regarding its funding capacity, Rocket said, “the Company’s warehouse line providers are all with large global money center banks or their affiliates,” according to an 8k filing with the Securities and Exchange Commission (SEC). UWM added that 90% of the “company’s $9.3 billion warehouse line capacity is with large global money center banks or their affiliates.”
Mr. Cooper also stated the company’s corporate uninsured cash accounts are held in money centers and global investment banks. Client funds are held in insured deposit accounts at a mix of money centers and regional banks, the company said.
“Separately, the Company disclosed that over the course of the first quarter, it has increased the target hedge ratio on its MSR hedge position to 75% of the net duration risk in its MSR portfolio from 25% at year-end 2022, with the goal of mitigating the risk to capital and tangible book value in a declining interest rate environment,” the company said in a Form 8K filing.
Mauro Guzzo, founder and executive chairman at brokerage firm Guzzo & Co, said he has not seen lenders further tightening lending conditions since last week. However, according to Guzzo, the banks’ crisis could change the market by potentially lowering interest rates.
“But this is something which has not been announced just yet,” Guzzo said. “The Fed will need to make a difficult decision between continuing to fight inflation or instead bring down the rates to calm the market down.”