Recent Bank Failures Create Ripple Effect For Independent Mortgage Banks

Mortgage News March 28, 2023

The banking industry experienced a tumultuous start to March with the failure of three banks, including Silicon Valley Bank (SVB), which was the nation’s 16th largest bank with $212 billion in assets. The other two banks that failed were Silvergate Capital Corp. and Signature Bank, both known for their friendly stance towards cryptocurrencies, and had assets of $11.4 billion and $110 billion, respectively. The failures of these banks caused panic in markets worldwide and led investors to seek safe investments such as U.S. Treasuries, resulting in a decline in interest rates.

Although it is still too early to assess the full impact of the bank failures, experts suggest that lenders in the mortgage banking market take prudent measures to protect themselves against downside risks. This includes focusing on bank-sponsored warehouse lines used by independent mortgage banks (IMBs).

All three failed banks had customers concentrated in a narrow industry segment and held a high volume of “hot deposits,” which were prone to flight in search of better returns. SVB, in particular, had a longer-term investment portfolio that was impacted by the doubling of interest rates in 2022 due to the Federal Reserve’s monetary tightening policies. As of December 31, 2022, SVB had a total securities-investment portfolio of $120.1 billion, including over $16 billion in Treasury securities and around $64 billion in agency-issued mortgage-backed securities. However, much of the MBS portfolio involved mortgages originated before the rate run-up induced by the Fed, resulting in a $1.8 billion loss due to the volatile rate environment.

In response to the bond-sale loss, SVB announced that it would seek to raise capital to replenish its equity, which spooked the markets and led to a social media-amplified run on the bank, ultimately leading to its collapse. The failure of SVB, the largest bank failure since 2008 and the crash of Washington Mutual, highlights the importance of prudent risk management and diversification for banks, particularly those with high concentrations of customers in narrow industry segments.

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