The recent failures of Silicon Valley Bank and Signature Bank have brought to light the ongoing tumult in the banking industry, which also threatens liquidity channels for independent mortgage banks (IMBs). Moody’s Investor Service recently singled out two banks, Western Alliance Bank and Comerica Bank, for potential ratings downgrades due to their reliance on confidence-sensitive uninsured deposits, material unrealized losses linked to devalued bonds, and relatively lower levels of capitalization. These banks are among the nation’s top warehouse lenders, providing IMBs with lines of credit and another financing for mortgage origination.
Although executives from both banks have claimed that their institutions are well-managed and well-capitalized with diversified deposit bases and strong liquidity positions, a systemic industry shock can still pose a threat to even a solid lending line. As a result, Western Alliance, Comerica, and several other banks have been the focus of Moody’s rating downgrades. The outcome for these banks will have an impact, positive or negative, on the mortgage industry.
The core of the ongoing banking crisis is the significant amount of unrealized losses, totaling $620.4 billion as of yearend 2022, resulting from past bank investments, primarily in longer-term U.S. Treasuries and mortgage-backed securities. These assets, which were secured at low coupons, have decreased in value due to the sharp increase in interest rates over the past year. The combination of potential investment losses and a significant withdrawal of deposits, primarily due to panic, was a major contributing factor to the downfall of SVB.
According to Brian Hale, founder and CEO of Mortgage Advisory Partners consulting firm, there is presently a significant consolidation of deposits occurring within the banking sector, with a shift from community and regional banks to large, “too-big-to-fail” mega-banks. While a high volume of uninsured deposits is not necessarily an indication of retention issues for a lender, every bank has its unique characteristics. Despite this, industry experts, including Hale, maintain that unless there are deliberate actions taken to stabilize the situation, the possibility of future bank runs is a real concern.
