Why failing banks is good news for mortgage rates

In the last few weeks, a handful of big banks have failed including Silicon Valley bank signature bank, and now First Republic Bank.
While this is not a repeat of 2008, it does signal instability in the broader mortgage market which may be good news for long-term mortgage rates. Hear some things to consider…

First things first the reason why banks are failing is due to the depositors withdrawing funds. If you’re a bank you need to lend money for a return higher than your cost of funds creating a financial arbitrage. Deposits can be a liability for a bank particularly if those funds are not being lent out. When depositors pull out their funds it’s problematic since you don’t have a way to generate income. If you need to raise cash, with dwindling deposits your only two options are to borrow money or sell debt. Borrowing money at 5.25 (current discount rate) means you’re paying more, without revenue to offset it, so your remaining option is to sell debt, subsequently in a downward spiral without big working capital.

This is why the banks are failing. As the Fed continues to hike interest rates to combat inflation this is going to be a problem that’s going to affect more banks going forward throughout 2023.

The Fed has a real problem on its hands- keep the banks healthy and solvent while at the same time trying to maintain inflation and you can’t have your cake and eat all of it too so. As a result, more banks are going to fail. Here’s the silver lining-if you’re a refinancing homeowner or if you’re a would-be homeowner looking to purchase a home, long-term mortgage rates will decline which will improve borrowing power when purchasing a home and will lower your monthly payment when refinancing a home.

Here’s why when a bank fails it signifies instability and a degree of uncertainty, and when there’s any instability or uncertainty in the markets in any capacity in any way that generally causes a selloff in the stock market, people will move their money from the stock market into the fixed income market where they can get a safe haven on their money.  So when this movement of money transpires the bond market rallies, yields rise and rates come down to the consumer driving the cost of funds lower subsequently improving borrowing power when buying a home or when refinancing a home.

The pendulum has already started swinging in the right direction for consumers who have been penny pinched with these mortgage rates. Long-term rates will come down subsequently affording more families the opportunity to pursue homeownership or reduce their present cost of homeownership.

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