Wednesday, March 22, 2023

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Mortgage Rates vs. Bank Failures

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You’ve heard about you know about it.

last week Bank of Silicon Valley was targeted by its actions, leading the FDIC to take control of the company in question on March 10.

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It was the first bank failure since October 2020 and was followed by another failure, Signature Bank in New York.

That led the Federal Reserve to create the Bank Term Funding Program (BTFP) over the weekend.

Providing loan services to banks credit union, etc. for up to one year. using the US Department of the Treasury Agency Debt and mortgage-backed securities

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The move aims to back these institutions and calm financial markets. But what will happen to mortgage rates?

Silicon Valley Bank Becomes First Bank to Fail in 870 Days

Before Silicon Valley Bank (SVB) failed, we were 870 days without bank failures.

I guess earlier this week the term “bank failed” wasn’t a huge search term and wasn’t a problem on anyone’s radar.

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We all have our eyes on inflation and the Fed’s multiple rate hikes to manage it.

somewhat ironic Interest rate hikes are what happened in SVB. The company holds large amounts of long-term debt instruments, such as collateral, that have lost a lot of their value due to rising rates.

This time it wasn’t subprime mortgage debt. But it’s a 30-year fixed mortgage debt backed by an agency.

It is not toxic on the surface. But since mortgage rates rose from under 3% to about 7% in just one year, holding on to those old MBSs was bad for business.

SVB also supports joint ventures. startup company and high-income individuals Means if they decide to withdraw the deposit. There will be large amounts of money at stake from a small number of customers.

Meanwhile, banks like Chase have nearly 20 million accounts, and most of them are tied to customers with relatively small deposits. Means no bank action.

What does the Fed do now? Increase the price or pause?

before all the failures The Federal Reserve is expected to raise the Fed rate by 0.50% next week.

Then the 0.25% probability makes sense once the SVB unfolds. Now it’s possible the Fed won’t raise rates at all.

And expectations for the Fed’s final interest rate have dropped to about 4.14% in December, compared to 5%+ last Friday.

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

Although the Fed continues to fight inflation But the failure of this bank may have taken precedence.

It is also possible that the data will support a softening stance of inflation along the way.

Either way, mortgage rates may be peaking now.

Mortgage rates tend to fall as banks fail.Bank Failure vs. Mortgage Rates

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

Today, it’s closer to 3.5%, which alone might be enough to push the 30-year fixed mortgage rate down by a similar amount.

And if the Fed halts rate hikes and eventually signals a more aggressive stance, Mortgage interest rates may continue to decline.

A quick look at 30-year fixed interest rates and I see a vanilla loan scenario priced in the high 5% range.

If this turns out to be a turning point We may see a return to 4-year mortgage rates later this year.

But what about some historical significance? I created a graph showing bank failures (blue) and average 30-year fixed mortgage rates (red).

Comparison of FDIC failures across all institutions in the United States and other areas. and Freddie Mac’s average 30-year fixed-rate mortgage in the United States. which is retrieved from the Federal Reserve Bank of St. Louis.

I focused on the Great Recession. Hundreds of banks failed at that time. It’s not clear what will happen again here. But it’s a must see.

As you can see, the 30-year constant tended to drop from the 6% range to the 4% range due to increased bank failures in 2009 and 2010.

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

Bank Term Funding (BTFP) is not like that. but loaned him out relax as opposed to tightening

For the record, mortgage rates also tended to decline during the savings and loan crises of the 1980s and 1990s.

There’s a good chance that mortgage rates will drop. but may change

The SBV (and BTFP) situation should be good for mortgage rates.

Simply put, this development has forced the Fed to step off the pedal and re-evaluate rate hikes.

The 10-year Treasury yield fell 0.50% in two days, indicating a sharp drop in mortgage rates.

If the Fed reiterates that it will hold interest rates next week and lead in a more relaxed tone Mortgage interest rates may continue in a downward direction.

But there is a lot of uncertainty, including tomorrow’s CPI report. The Fed doesn’t want to abandon the inflation battle altogether. The data indicates that this is still a big problem.

With that in mind, I expect mortgage rates to improve over time in 2023, but things may change along the way.

And there may be a spread among the lenders. So be extra diligent when getting quotes from one mortgage company to another.

Things tend to fluctuate as banks and mortgage lenders deal with this tricky environment.

I expect mortgage interest rate pricing to be cautious as no one wants to be caught on the wrong side.

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

In principle The result is a ~4% 30 year fixed mortgage rate that promotes a good housing market with a better balance between buyers and sellers.

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