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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 30 May 2023 C O V E R F E A T U R E Van Doorsselaere: Silicon Valley Bank and several other failing institutions were hit after central banks raised interest rates following a long period of low or even negative rates. SVB, notably, had invested in long-term assets with a fixed rate or larger fixed components. When rates rose, the value of these assets plunged, creating either virtual losses in a held-to-maturity portfolio or a loss in equity for available-for-sale assets. There are some risk issues that could have been explored more thoroughly. The disruptions caused by the Silicon Valley Bank and Signature Bank failures are prompting calls for U.S. regulators to consider adopt- ing Europe's Basel rules around the interest rate risk in the banking book (IRRBB) put in place after the 2008 financial collapse. Many believe these guidelines would have flagged problems at the affected banks much ear- lier—and allowed regulators to act, possibly even saving the banks. Vella: The current bank failure environment is centered around the series of rate increases' impact on capital and bond exposure, whereas in 2008, the issues were mainly due to credit impairment and bad loan portfolios. The amount of work that went into stabilizing the impact of 2008 has led to a more structured approach to managing crisis in our industry. The loans that are currently on the books have the lowest delinquencies in years, while servicers and originators are fully prepared to react to market adversity in a more timely and organized fashion. Regulation has continued to evolve, helping to identify issues earlier in the cycle to alert and effectuate change. Q: What repercussions, if any, could the failures of Signature Bank and Silicon Valley Bank have on the mortgage finance space? Channel: Following the failures of Signature and Silicon Valley banks, I'm sure that some lenders—especially those that service areas with a heavy tech industry presence—did adjust their rates or tighten their lending standards in response to these recent bank failures. That said, I think other factors present in the economy—like cooling inflation or the risk of an upcoming recession—have had and/or will have a much bigger impact on the mortgage finance space than these recent bank failures. Middleman: When banks fail, credit typically tightens. Banks and other lenders tend to hoard money and lend less. So, the overall liquidity in our industry will be challenged by tighter or less availability of warehouse credit, mortgage servicing rights credit, and general liquidity available to borrow from institutional lenders. Additionally, uncertainty impacts the pub- lic markets. They become closed or challeng- ing to those who would raise capital through debt financing. Similarly, the public markets close or become more challenging for those seeking to raise capital by selling equity in their entity. This is the essence of tightening credit and goes all the way through the system to the consumer at every level. We expect a credit tightening will drive up credit capital costs to the participants in the industry and limit the availability of that capital to only the best-capitalized institu- tions at a higher price. Muoio: Increased risk aversion and the likelihood of tighter regulatory scrutiny of regional banks suggests that there will be a tightening of CRE mortgage lending. Since regional banks hold about two-thirds of bank-originated CRE loans, this will be a constraint on the CRE segment in the immediate future. Recent events could also lead to an increase in distressed debt in the market. This will present both a challenge for those holding the debt and an opportunity for those looking to invest at a discount. This is not the first time we're seeing higher levels of distress in the market and, similar to 2008, we are helping both buy-side and sell-side clients understand their options whether that be through comprehensive diligence, expert- led valuations or even special servicing, in order to pursue the best possible outcomes for their CRE portfolios. Preuss: There are three reasons I believe that the impact of the recent bank failures will have a limited impact, at least on mortgage finance. First, homeowners are in a much differ- ent position today than they were in the past. They have a great deal more equity, and that gives them the power to refinance if they have to, even if their new interest rate will be higher. They won't have to lose their proper- ties, as long as mortgage servicers do what is necessary to get these borrowers back to the negotiating table. Second, mortgage servicers learned a "SVB, notably, had invested in long-term assets with a fixed rate or larger fixed components. When rates rose, the value of these assets plunged, creating either virtual losses in a held-to-maturity portfolio or a loss in equity for available-for-sale assets." —Jeroen Van Doorsselaere, VP of Global Product & Platform Management, Wolters Kluwer