California’s Silicon Valley Bank failed last week. Orion’s brokers are asking, “What does it mean for the mortgage world?”
Generally speaking, bad news drives interest rates, including mortgages, down. A bank failure of any size, and especially one as large as this, spooks investors who immediately engage in a “flight to quality” which means moving assets to the least amount of risk. Fears of a broader fall out across the banking sector deepened as SVB Financial Group (SIVB.O) on Friday became the largest bank to fail since the 2008 financial crisis.
The Federal Deposit Insurance Corporation (FDIC), which was appointed receiver, was trying to find another bank over the weekend that was willing to merge with Silicon Valley Bank with its $209 billion in assets (16th largest in the United States). Structuring a deal like that is very complicated, and it is thought that regulators would be required to give special guarantees and make other allowances for any buyer.
The bank focused on Santa Clara Valley startups and investors, not on residential lending. But things can spread, and the psychology of investors and the markets can be impossible to predict. Some analysts and prominent investors warned that without a resolution by Monday, other banks could come under pressure if people worried about their deposits. Small community banks could face issues and therisk is much higher if uninsured depositors of SVB aren't made whole. Silicon Valley Bank had an unusually high level of deposits that were not covered by the FDIC's guarantees, which are capped at $250,000.
Orion’s management and AEs are watching the situation. Independent mortgage bankers like Orion have warehouse lines with banks, and this source of funding is their life blood. Restoring stability in the banking system is of critical importance, whether or not SVB provided warehouse lines to lenders.
As noted above, the news has caused a flight to quality as investors seek safety. After the news was announced, bond prices, including bonds backed by residential mortgages, rose due to the increased demand. Bond prices and interest rates have an inverse relationship, and so as prices rose, rates fell. And our brokers should know that while this is good news for anyone thinking about buying a home, the reason rates fell (a bank failure) is not good news.That said, it is unlikely to interrupt the flow of mortgage financing around the nation.
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