mortgage rates vs bank failures

You’ve heard about it, you know about it.

Last week, the Silicon Valley bank was the target of a bank run that prompted the FDIC to take over the troubled company on March 10.

It was the first bank failure since October 2020, and was shortly followed by another failure, NYC-based Signature Bank.

This prompted the Federal Reserve to create the Bank Term Funding Program (BTFP) over the weekend.

It provides loans to banks, credit unions, etc. for up to one year, using US Treasuries, agency loans, and mortgage-backed securities as collateral, with assets appraised at par.

The move is aimed at backstopping these institutions and calming the financial markets. But what about mortgage rates?

Silicon Valley Bank the first bank to fail in 870 days

Before the failure of Silicon Valley Bank (SVB), we Was Been a good 870 days without a bank failure.

My guess is that before last week, the term “bank failure” was not a major search term, nor was it a concern on anyone’s radar.

Instead, we were all bullish on inflation and said the Fed had several rate hikes to combat inflation.

Somewhat ironically, the same rate of increase has occurred in SVB. The company had a bunch of long-term debt, such as mortgage-backed securities, that lost a ton of value due to rising rates.

This time it was not a subprime mortgage loan, but an agency-backed 30-year term mortgage loan.

It was not toxic on the surface, but because mortgage rates From sub-3% to nearly 7% in just one year, holding those old MBS was not good for business.

SVB also provided services to venture companies, startups and high-net-worth individuals. Meaning if they decided to pull the deposit, a larger amount would be at stake than a smaller number of customers.

Meanwhile, a bank like Chase has about 20 million bank accounts. And they are mostly tied to customers with relatively low deposits, meaning no bank runs.

What does the Fed do now? Raise rates or freeze?

Before this whole fiasco, the Federal Reserve was expected to raise its fed funds rate by another .50% next week.

The .25% probability makes sense after the SVB opens. Now it possible The Fed doesn’t raise rates at all.

And expectations for the Fed’s terminal rate have dropped to around 4.14% for December compared to last Friday’s 5%+.

The fed funds rate is currently set between 4.50% and 4.75%, meaning the Fed could cut rates between now and the end of 2023.

This banking failure may take precedence, despite the Fed’s ongoing battle with inflation.

It is also possible that the data will support a softer stance on inflation along the way.

Either way, mortgage rates may have peaked for now.

Mortgage rates go down when banks failbank failure vs mortgage rate

The 10-year bond yield, which closely tracks long-term mortgage rates, was priced at about 4% before the SVB exploded.

Today, it’s closer to 3.5%, which alone could be enough to push 30-year fixed mortgage rates down by the same amount.

And if the Fed does indeed hold off on rate hikes and eventually signals a more hawkish stance, mortgage rates could continue to decline.

A quick look at 30-year fixed rates and I’m seeing vanilla loan scenarios in the high 5%-range.

If this proves to be a turning point, we could see mortgage rates return to the 4s by the end of this year.

But what about some past examples? I’ve created a graph that charts bank failures (in blue) and the average 30-year fixed mortgage rate (in red).

compares data FDIC Failures of All Institutions for the United States and Other Territories And this Freddie Mac 30-Year Fixed-Rate Mortgage Average in the United StatesRetrieved from Federal Reserve Bank of St. Louis.

I focused on the Great Recession, because there were hundreds of bank failures then. It’s unclear what will happen here again, but it remains to be seen.

As you can see, the 30-year certainty fell from the 6% range to the 4% range in 2009 and 2010 as bank failures escalated.

Of course, the Fed also introduced quantitative easing (QE) in late 2008, from which they bought Treasuries and mortgage-backed securities (MBS).

Bank Term Funding Program (BTFP) not quite, but lends itself Easy the opposite of tightening.

For the record, mortgage rates also came down during the savings and loan crisis of the 1980s and 1990s.

Mortgage rates likely to go down, but could be volatile

Without getting too complicated here, the SBV situation (and BTFP) was positive for mortgage rates.

Simply put, this development has forced the Fed to take its foot off the pedal and re-evaluate its interest rate hikes.

A .50% drop in the 10-year bond yield in two days indicates very low mortgage rates.

If the Fed confirms that by keeping rates steady next week and moving forward with a more accommodative tone, mortgage rates could continue their downward trajectory.

But there’s a lot of uncertainty, including cpi report Tomorrow. The Fed may not want to give up on its inflation stance entirely as the data indicates it is still a major issue.

To that end, I expect mortgage rates to improve over time in 2023, but things could be volatile along the way.

and may Wide spread among lenders, So be extra diligent when getting pricing from one mortgage company to another.

Things will likely be volatile while banks and mortgage lenders navigate this tricky environment.

I expect mortgage rate pricing to be cautious because no one wants to get caught on the wrong side of things.

This supports the idea of ​​lower mortgage rates later in the year as the dust settles and the picture becomes clearer.

Ideally, the end result is a ~4% 30-year fixed mortgage rate that fosters a healthy housing market with a better balance between buyers and sellers.

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