Why Did Silicon Valley Bank Fail, and What Did It Do to Mortgage Rates?

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A replayed radio interview: is buying a home still a good idea?

Debbie opened the show by replaying a radio interview she had recorded with a morning-show host on a local country station.

Host: Excited to be talking with Debbie Marcoux, the Mortgage Mom. Long time no chat — how have you been? There's a lot that's been going on since we last spoke. Interest rates are on the rise, and the question is: is buying a home today still a good idea?

Debbie: I love that question, because I get it every day. I do believe it is a good idea. I've been doing all kinds of research, reading every article, looking at all of the numbers, and it does appear we're actually starting to get more applications — people finally getting off the fence, because you can only put your life on hold for so long.

From everything I'm reading, they're anticipating a slow year for real estate transactions, but they expect transactions to jump by 17% the following year. That creates more volume, more competition, more people going after the same home. Our inventory is still very, very low, and that's going to continue — people who already own their homes have very low interest rates, so it makes more sense for them to stay put. You have fewer properties available. So when we get that spike in people wanting to buy, you're going to have multiple offers again and a lot more competition.

Buying something while things are slower — and having the opportunity to refinance later when rates do come down — gives all of our first-time buyers with low down payments, and maybe not the most favorable credit scores, the possibility of negotiating with a seller, getting their offer taken seriously, and even getting credits toward closing costs and buying the interest rate down. That is not going to happen when there are multiple offers on homes. So I do think this is actually a very good time to buy, and it's especially good for people with the lower down payments — the zero-down vets, the 3.5%-down FHA borrowers. It really gives them the possibility of being taken seriously and getting into escrow.

Host: How can people get in contact with you?

Debbie: They can always call my office — 844-935-3634, that's 844-WE-LEND-4 — or head over to mortgagemomradio.com.

Why the banking collapse is today's topic

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom. I ran that interview I did with a morning show host at the top — that sure was fun, and it was recorded before all of the weekend of craziness with the banking meltdown, and Monday's stocks and news and everything that's been floating around this week. It was even before we knew interest rates were probably going to start to come down, which is what we're going to talk about today. I hope I didn't lose too many of you thinking the cameras weren't working.

It's a really good way to start this show, because today is about the banking collapse and all of the news articles coming out — the ones you've seen on the news and that are flooding your inbox. It's really important for me to step back and talk about what happened, why that bank went down, why the other banks that are struggling are struggling, and what we foresee for the future — because it has a direct impact on mortgage and real estate.

Remember that this show is interactive. I'm doing this live, and you're watching it as it takes place. The audio goes to radio later — radio runs about a week and a half to two weeks behind, so what I talk about today won't be on radio this weekend, it'll be on next weekend. If you want to do this with me live, you have to watch every Wednesday, and then you can put your questions in the feed and I'll read them out loud and answer them for you.

The headlines this week, and what they all have in common

These are some of the articles I'm seeing. This one says bank failures and slowing inflation could lead the Fed to cool or even pause rate hikes. My secondary capital markets group came out Monday morning talking about what we could see happen after Silicon Valley Bank. USA Today breaks down exactly why they ended up in trouble, which I think is a really important piece to understand, and then what the outcome is. And Barron's: the Fed is now expected to rein in rates, with market pricing showing a shift amid the bank crisis.

These are all positive things from where we sit. If the Fed cools down on increasing rates, or keeps them level, we should see mortgage rates start to improve — which helps the real estate market move again. More buyers get out actively looking and placing offers. We have hit our lowest rate levels in about a month.

Pretty much every article and every person I'm reading and watching is talking about the anticipation of what the Fed is going to do. And remember that it is anticipation — it's people projecting their own opinion of what they think is coming. Keep in mind the next time the Fed meets is March 21st and 22nd. Next week they will make their announcement on the 22nd; they always announce on the second day of the meeting. So we're not going to truly know whether what we're talking about today is what actually happens. This is the speculation of financial experts in the field.

If rates do come down, low-down-payment buyers lose their leverage

One thing to keep in mind: if interest rates do start to come down, we're going to see more people get off the fence and back into the real estate market, looking at homes and placing bids. What does that do? We already have such a supply issue — we are beyond low on inventory at the moment — so you're going to have a lot of competition for every home listed for sale.

It's exactly what I've been saying week after week. If you're a first-time buyer with a lower down payment and maybe not the most favorable credit score, and you're asking the seller to pay some closing costs to help you buy your rate down or bridge the gap on your down payment, your offer may not be the one they select in a multiple-bid situation. So if buying a home is one of your goals for 2023 or even 2024, I urge you to reach out. Let's talk about your roadmap, the game plan, how much money you need, what a monthly payment looks like, how much you can qualify for — and maybe get you out shopping before the herd.

Why did Silicon Valley Bank collapse?

Debbie read from a USA Today explainer, stopping to translate as she went.

Silicon Valley Bank was hit hard by the downturn in technology stocks over the past year, as well as the Federal Reserve's aggressive plan to increase interest rates to combat inflation. We all know they've been increasing rates — we've all been feeling it. We also know we've got a major inflation issue, and we're feeling that everywhere: utilities, groceries, gas.

The bank bought billions of dollars worth of bonds over the past couple of years using customer deposits, as a typical bank would normally operate. I want you to make sure you heard that: this is a normal situation. This is what banks do. They didn't do anything wrong. These investments are typically safe — but the value of those investments fell, because they paid lower interest rates than a comparable bond issued in today's higher-rate environment would pay. Typically that's not an issue, because banks hold onto them for a long time. Unless they have to sell them in an emergency.

Silicon Valley's customers were largely startups and other tech-centric companies that started becoming needier for cash over the past year. Venture capital funding was drying up. Companies weren't able to get additional rounds of funding for unprofitable businesses, so they had to tap their existing funds — often deposited with Silicon Valley Bank, which sat at the center of the tech startup universe.

To break that down: these startups have capital sitting in their bank account, but instead of spending it they take startup loans to get off the ground, keeping the capital in the account. Then when they run out of runway but aren't where they need to be yet, they go in for a second round of funding, sometimes a third. With rates rising and these companies not doing well enough, they haven't been able to get that funding — so they start tapping the capital sitting in the bank. But the bank used that money to buy bonds, and those bonds aren't worth today what they were when the bank bought them. So the bank can't sell them at face value to get the money back to give depositors their money. It becomes this big circle of a problem.

So customers started withdrawing their deposits. Initially that wasn't a huge issue, but the withdrawals started requiring the bank to sell its own assets to meet withdrawal requests. Because Silicon Valley's customers were largely businesses and the wealthy, they were likely more fearful of a bank failure, since their deposits were over $250,000 — the government-imposed limit on deposit insurance.

That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent. The bank tried to raise additional capital through outside investors but was unable to find them. The fancy tech bank was brought down by the oldest issue in banking: a good old run on the bank. Bank regulators had no other choice but to seize Silicon Valley Bank's assets to protect the assets and deposits still remaining.

Now think about it — if Silicon Valley Bank had this problem, there are other banks in the same scenario. We saw it first at SVB because they were the big name and the first to go, and they were first because of where they sat: a huge startup area, a big tech area. Think about which stocks have dropped the most since the Fed started increasing rates. Tech stocks got hit first, then others followed, and at this point a lot of stocks have been down for quite some time.

What the capital markets desk told loan officers

Debbie then read the Monday-morning note from the secondary/capital markets department at the mortgage company she originates through.

Friday had the second-largest bank collapse in history, as Silicon Valley Bank was taken over by the feds. The largest was Washington Mutual back in 2008, and we are all too familiar with what led to their demise — that was during the Great Recession, during a major housing crisis.

This has ignited concerns and a lot of conversations about financial risk, primarily centered around banks with a high concentration of tech deposits. Over the weekend the Fed stepped in to close Signature Bank, and we're hearing rumors of other banks that could be vulnerable.

The main cause is ultimately due to the Fed's interest rate increases — although stronger risk mitigation and management could certainly have placed these banks in a stronger position. But retaining deposits is harder than ever for these banks: money market rates are as much as 50% higher than the interest paid on savings accounts, and as deposits flee, banks could be forced to book what had only been paper losses on mortgage bond and Treasury holdings they are forced to sell.

The market this morning has Treasuries racing, as the Fed announced a temporary solution to this latest crisis. U.S. authorities took extraordinary measures to shore up confidence in the financial system, including a backstop to protect all depositors, as well as the Fed's new Bank Term Funding Program, which allows one-year loans to banks under easier terms than it typically provides. The program will allow banks to borrow the full face value of their Treasuries and some other securities even if the market price has fallen below that level.

That's exactly what we just talked about — Silicon Valley Bank couldn't sell the Treasuries it held without taking a huge loss in order to get cash back to depositors. This matters for banks sitting on $620 billion of unrealized losses in their investment portfolios. Instead of selling a security at 90 cents on the dollar, they can now get the full dollar for one year. Yes, they are kicking the can down the road for another year. End result: depositors will get their money at Silicon Valley and Signature banks — and mortgages are at their best levels in over a month.

Back to the January sweet spot

We did have a nice little sweet spot. If you've been listening for a while, I told you back in January that rates had dropped significantly and we were far below the highest levels we'd seen in October of 2022. Then we got a run on rates — rates went back up as much as three quarters of a point from that sweet spot. Now we're in the middle of March and we're hitting the very best interest rate levels we've seen in over a month. We're back at that sweet spot.

So if you were shopping for a mortgage to buy a home, or shopping for a refinance, and you finally decided to pull the trigger and found out the rate was significantly higher than you expected — so the payment didn't make sense, or you didn't qualify for as much as you wanted, and you put your plans on hold — we're back at that sweet spot again. Don't leave it on hold. Give us a call and let's talk about your scenario.

What I watch, hour by hour, to tell you whether to lock

Before I get to what's expected: I am not a financial analyst and I'm not a financial advisor. I'm reading you the information I'm finding and researching, and giving you the opinions and information I'm seeing so that you're in the know.

I get hourly text messages starting at 6 a.m. I subscribe to a service that gives me up-to-date numbers once an hour on where mortgage-backed securities and the Treasury markets are. When clients ask me — should I lock my rate, should I wait, what should I do — that gives me a good overall indicator of what's happening in the market, which then transcends into mortgage rates.

How buyers got squeezed out, 2020 through 2022

2020 was absolutely amazing — rates were awesome and we were doing crazy refinance volume. Pretty much if you owned a house and had a mortgage, you refinanced between 2020 and mid-to-late 2021. Then in the last quarter of 2021 I started making sure my listeners knew rates were on the rise. The Fed was already talking about getting increases started, and I said if you need to do something, act now. Not a lot of people listened, and I wish they had — because from the beginning of 2022 to the end of 2022, within a 12-month period, our interest rates more than doubled.

That's hard. People who had been pre-approved to buy a home could no longer afford the prices they were trying to get into. And they'd already run into a brutal situation in 2020 and 2021 trying to get an offer accepted, because inventory was low — unless you were willing to pay all cash, remove every possible contingency, or pay over list price.

I saw an offer come across my desk that almost made me pass out. The buyer was offering the seller a free rent-back for six months. If you don't know what a rent-back is: the seller needs extra time to move, so they close the sale and then rent the property back from the new owner. This buyer offered six months of it, free, just to get their offer accepted. Getting a seller to help with closing costs or buy your rate down was simply not happening. People were going in over full price, removing every contingency imaginable — I'll buy it as is, I don't care about an inspection, I don't care if it appraises, I'll pay more than it's worth, I don't care about my loan contingency, I'll lose my deposit if I don't get approved.

That was very, very difficult for the buyers with 3.5%, 5%, or 10% down payments who needed the seller's help with a concession — because you have your down payment need and then your closing costs on top of that. So most of them were still sitting there in 2022 after making multiple offers, hoping that would be their year. And what they qualified for at the beginning of 2022 wasn't close to what they qualified for at the end of it. That pushed them out of the market.

Triple the buyers, if rates drop

I'm talking to those people right now. And if you weren't one of them then but you are now — because we're all evolving — do not let yourself get back into that situation. Inventory is still very low. There are not enough homes for sale for all of the buyers. There are multiple offers on properties right now, today, purely because of reduced inventory.

If rates come down further, you've got everyone who missed out in 2022, plus everyone whose goal it is in 2023 and 2024. That's triple the people coming out to look. It brings investors back in to gobble up properties. You'll have the all-cash investor, you'll have the buyer who has been saving and has 20% down or more — and if you're one of the lower-down-payment buyers, you'll find yourself struggling to get into a home all over again.

So please get pre-approved. Let's get you ready to go and connected with a really good real estate agent. I did a whole show last week on picking the right agent — whether you're buying or selling, it matters enormously. You need somebody who is 100% in the game of real estate, doesn't have a second job, doesn't do it on the side for friends and family. You need somebody for whom this is their full-time job and you are their priority. I can help connect you to the right person for where you're looking.

Monday's alert: “and just like that, everything changed”

I woke up Monday morning and got the first ray of sunshine the mortgage industry has had in quite some time. The alert read: “And just like that, everything changed, and no one saw this coming. Rate sheets this morning are going to vary dramatically, but all of them are going to be better. We are seeing huge moves in bonds this morning due to the banking meltdown. Lock desks are going to struggle to price all of the volatility in, and we're going to see big gaps among lenders until the dust settles.”

So they're forewarning us: yes, bonds are much better today than last week, but it's going to take time for that pricing to work into the rate sheets from one lender to the next.

“We have not seen a true flight to safety like we've seen this morning in years. Traders are freaking out about the bank situation. This was not something anyone was predicting or even talking about, but it will now affect the mortgage rate forecasts tremendously. Just like the sentiment shift back on February 3rd, this has flipped markets on their head. We are now seeing a full 180-degree shift. Instead of a forecast for the Fed to hike rates to 5.5%, 5.75%, or even 6%, we are now seeing Fed futures calling for immediate pausing of all Fed rate hikes at 4.5%.”

This is not something anybody could have predicted or foreseen — just like COVID, when nobody expected the Fed to take rates to near zero and spark that absolute boom. And who would have thought this could make tomorrow's CPI inflation data irrelevant? That's what they're saying: it didn't even matter what the inflation numbers were. This news trumped it.

Barron's said traders are rapidly shifting their expectations of the Federal Reserve's next move amid the crisis of confidence sweeping U.S. banks, with market pricing suggesting a significant chance the central bank makes no change to interest rates in March. Fed funds futures were whipsawing Monday morning, with the chance of no change after the March 21–22 meeting at around 30% according to the CME FedWatch Tool, and pricing for the terminal rate — the peak of rates in the current hiking cycle — also falling.

February inflation cooled for the eighth straight month

The last one I'll read: bank failures and slowing inflation could lead the Fed to cool or even pause rate hikes. It notes that it's only Wednesday but it already feels like next Wednesday — a lot has happened in the past week that could influence the Fed's rate hike decision on March 22nd. Three banks collapsed, including the second-biggest bank failure in U.S. history, and the February inflation report came out yesterday.

The inflation report showed additional signs of easing. The pace of inflation cooled for the eighth straight month — good — but it's not slowing as fast as the Fed would like — not so good. Still, it is slowing. No surprises: U.S. consumer prices were up 0.4% for the month and 6% for the year, as expected. Energy dropped, but housing costs soared. Stocks popped after the release, and traders priced in an 85% chance the Fed will hike by 25 basis points, down from 50 last week.

So Barron's is saying maybe they hold and don't move at all; this piece says most traders now anticipate only a quarter point, where they had been pricing in at least a half. All of it is still very good news for mortgage rates, which is why we're seeing them better today than they've been in over a month.

The last paragraph: panic could force the Fed's hand to cool its hiking crusade. The administration and U.S. regulators seem willing to do just about anything to prevent a banking crisis, and while the Fed wants to temper sticky inflation and the hot labor market, it really wants to avoid a crisis. The aggressive interest rate environment contributed to bank failures and has been one of the main causes of the stock market's woes.

So how does all of this affect us?

Our interest rates came back down to just about the sweet spot we were in in January. They may continue to improve. If the Fed only raises a quarter, we will probably see mortgage rates improve further. If the Fed doesn't raise at all, we will definitely see them improve further.

Rates improving makes housing more affordable, which gets more people out looking to purchase, which creates more demand and more economic stimulation. Stocks have popped since all of this came out, which means we're starting to see a bit of everything come back.

So if you've put home buying, a refinance, or a debt consolidation on hold, I hope this sparks something in you to start investigating it again. And if rates drop even further, we'll do it all over again — remember, back in January I said anybody who does a loan with Mortgage Mom in today's environment gets a no-fee refinance from us later if rates drop, so you can capitalize.

Going deeper on that: we've got a lot of people with FHA loans where the mortgage insurance is now cheaper — they've brought the mortgage insurance premium down. So you could be looking at a streamline refinance. If your current rate is higher and we've had this downshift, we could possibly lower both the rate and the mortgage insurance and get you into a lower monthly payment. There's a lot of opportunity here, and what it takes is a phone call to find out. You might find out that right now isn't the time — but then we know what you need and where you need to be, and we put you on a list so we can call you and say, hey, we got there.

Is your money safe?

A listener wrote in that this was good news and saved her a lot of reading. I agree — though I don't think it's good news that banks are collapsing. I feel for them. I'm self-employed, and I'm having a very hard time with lower revenue in my own business. We're making it through and making ends meet, but things definitely aren't what they were, not even in 2019. There are a lot of businesses struggling right now, not just those banks.

The positive side of a crisis is that maybe it opened the Fed's eyes to say: we went too fast, we went too aggressive, we need to slow this down and help. I think that's the best news we could possibly take from a potentially really bad situation.

One more thing. Thank goodness the FDIC rushed in when they did — it's really good that they're taking care of the people who had money on deposit. If you have less than $250,000 in your bank account at a federally insured bank, you are insured. I don't want anybody to feel like they need to run to their bank and pull their cash out. I really don't think we're in that kind of a situation. If you have more than $250,000 at one bank in one account, it's probably a good idea to reach out to your financial advisor and see what they suggest — they might have you move money around a bit, across multiple banks or different accounts. I'm not a banker, but reach out to your financial advisor to make sure you've got yourself covered just in case.

Wrap-up

I anticipate we're going to see mortgage rates continue to fall further. Rates falling further will spark more demand in the real estate market, and I think we'll see more transactions and more people buying. I think it's a good outcome from a really bad scenario.

If you've been thinking about buying, refinancing, or doing anything with your real estate, now would be a great time to get in front of it. Pick up the phone, call my office, go to my website, schedule an appointment. And if you haven't already, text the word MOM to 844-935-3634 — that's 844-WE-LEND-4 — so you know when I go live next Wednesday and we can all hear what the Fed decided to do. Same phone number to call the office, and mortgagemomradio.com. I'll be back here again next week right around one o'clock Wednesday Pacific time. Talk to y'all real soon.