Why Silicon Valley Bank failed and why it’s good news for mortgage rates going forward

The recent failure of Silicon Valley Bank points to a broader issue that banks particularly depository institutions face as relates to their financial stability. Here is how this benefits your finances when buying or refinancing a home…

Here is how a bank works, a bank takes the depositor’s money, and lends it out. They do so to gain an arbitrage or a higher return so they can pocket the difference. If they’re paying you one percent and they can then lend that money out and get three percent, they collect the 2% spread. So a bank works off of deposits. Deposits are considered to be a liability because it’s the mechanism by which they lend money to earn money. So Silicon Valley Bank had a run on deposits simply put, depositors began pulling their money out of the bank. When word began to spread on the street, the bank panicked and tried to seek additional funding to generate capital. They were super heavy lending in the last few years and have low-rate debt out there. lower than current yields. They couldn’t borrow money from the Fed because the Fed is increasing rates so they essentially were bled dry of their cash. If you’re a bank you can’t lend unless you have money to back up the debt, as a result, the bank failed. The same thing happened just 48 hours later to another big bank in America called the Signature bank for the same reason. Other banks are also in jeopardy as they operate in the same capacity which Silicon Valley Bank did. The Federal has true problems on its hands as they have increased rates dramatically to slow down inflation.

As a result, it is possible more bank failures could come in this year. The big question on everyone’s mind is this another 2008? The answer to that question is no. 2008 was brought on by exotic financial products backed by Wall Street whereas the environment today is still full of documentation and probably will remain that way. When a big bank fails particularly a big bank like Silicon Valley Bank for example it points to instability and a lack of consumer confidence in the system. When there is a lack of consumer confidence in this system trouble ensures for the stock market and people move their money somewhere where they can get a safe haven on their money.

The vehicle becomes the bond market aka fixed-income securities. When investors place their money in the bond market they drive the yields up and the rates to the consumers come down. This is what we want to see and this is exactly why for example when the 10 years Treasury rises mortgage rates generally tend to follow suit in the opposite direction i.e. coming down. So it is very possible in the latter part of this year we could start seeing lower mortgage rates.

It wouldn’t be unrealistic to think possibly a .75 to a 1% reduction in the average 30-year fixed rate mortgage as a result of future instability.  A mere 1% reduction in mortgage rate translates to about $70k of purchasing power on a home. It also drives additional competition. If you are preapproved and looking for a house be in communication with your lender. If you’re not, start today by getting a complimentary mortgage rate quote so you can figure out what the best option for you and your family is going forward.

 

 

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