Three Things to Know About The Silicon Valley Bank Collapse And Mortgage Rates
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By Ryan Casey Stephens, FPQP®
Special Contributor
The U.S. banking system faced total collapse this week, though we’ve staved off the worst danger for now. Since Friday we’ve seen two large banks fail and two more barely skirted going under. Silicon Valley Bank was the most notable and was the largest bank failure since 2008. More than $300 billion in deposits made it 16th largest bank in the nation.
The question you may be asking is, “What happened?” Understanding that answer is much simpler than figuring out where we go from here. The turmoil is having real effects on mortgage rates too. We’re going to attempt to concisely tackle as much as we can in this week’s Three Things to Know.
Silicon Valley Bank: Who, What, When, Where, Why, How?
You’d likely never heard of Silicon Valley Bank before last week, primarily because most of the accounts were investors, private equity, and corporate — especially tech companies. Like many other similar institutions, they benefited from the tech boom of 2020 to 2022. During that time, the bank spent billions on low-interest investments like Treasury Bonds and Mortgage-Backed Securities in order to make modest returns on their client’s deposits as well as meet Federal requirements on holding enough liquid assets.
As tech companies have been squeezed by high interest rates and layoffs, private equity firms aren’t pumping them full of cash, so they must run to the bank to withdraw larger and larger sums. SVB reached a point where they needed to start selling off those Treasuries and MBS in order to have enough cash on hand to give to clients. Unfortunately, yields on those products are now higher, so the securities from 2020 and 2021 they wanted to sell were heavily discounted — in other words, SVB lost tons of money on those investments. As this became worse and news spread, their stock price tumbled, pressure mounted, there was a run on their accounts, and the bank collapsed. With only 15 percent of accounts reportedly under the FDIC-insured level of $250,000, a lot of very successful people and large companies stood to lose billions of dollars.
First Thing to Know:
The Fed’s high interest rates, the existence of higher-yielding securities, faltering, cash-hungry tech companies, and a litany of other economic woes caused SVB to become a victim of their own risky business practices, though they weren’t alone. It looked as though more banks would fall in the snowball that was coming.
Yikes, Now What?
Initially, in what would become an almost hilarious reversal, Janet Yellen the U.S. Treasury Secretary released a firm statement that the government would not bail out the deposits at SVB. Instead, the Fed would have a closed-door meeting on Monday, March 13, to decide the next steps. When it became more obvious that thousands or even millions of Americans were planning to pull their money out of banks on Monday in response, Yellen announced that all of the “lost funds” would be available, and the load of reimbursing them would be spread over the whole banking system. The claim is that the taxpayer won’t be responsible, but we all know banks will find a way to make up the losses.
The Fed will meet, though the outcome is a mystery. Last week it seemed likely the Fed might hike .50 basis points at their next meeting in an effort to double down on inflation. However, with banks folding under the pressure of high rates, there’s a growing chance they might not hike at all, and may instead wait to see the longer-term effects of the last year of rate raises.
Second Thing to Know:
The U.S. response to the collapses matched the level of mess many have come to expect from our financial leadership. While it seems no one in power is on the same page, the actions they did take might have bought enough time to create a more thoughtful response. Ceasing rate hikes will be a relief for embattled banks, but pausing the fight against inflation carries other ominous risks.
Perhaps the Only Silver Lining
The immediate reaction from Wall Street has been a move to mortgage-backed securities. There are many reasons for this, but the major one is that one of the Fed’s only tools to grant banks extra liquid cash in a pinch is to purchase them. The Fed hasn’t purchased MBS in any major capacity since they pivoted to raising rates, so re-entering the market as a buyer would be big news.
It’s not risk-free rainbows for mortgage lenders, though. This week we’ll get the latest CPI inflation data which is expected to rise slightly, as well as PPI inflation data. Jobless claims data on Thursday will likely be overshadowed by potential tech layoffs in the fallout from the failure of SVB.
Third Thing to Know:
The irony of the crisis is that we might benefit with lower mortgage rates in the short term. No one should be celebrating, though, because if the Fed must pause the fight against inflation this week there may be greater pain down the road.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
