Everything Is Fine…Until It Isn’t
The former owner of RPM Mortgage (now merged with Cross Country) told me about a particularly harrowing ordeal he went through in 2008. His company had locked tens of millions of dollars of loans with the intention of selling them to particular investors when they closed.
RPM underwrote and funded the loans on their warehouse lines of credit, but when they went to sell the loans, the investors all told RPM they weren’t buying. This was so shocking because up until that point the investors had given no indication at all that they would not buy the loans.
RPM faced millions in losses because they had to sell the loans to survive and there were simply no buyers. They did finally find buyers, but it was through herculean efforts, the losses were still enormous, and the stress was unimaginable for RPM’s owner, as he faced complete and total ruin.
This happened to us too, but on a MUCH smaller scale, when COVID hit in 2020, as many investors simply pulled out of the market and refused to buy loans we had locked and underwritten with the sole intention of selling the loans to them.
I tell these stories because any lender can do the same thing to any borrower. They can pre-approve, underwrite and promise financing – only to yank it away at the 11th hour without warning.
The Rich Are Moving Cash Out of Banks
Wealthy depositors have been moving cash out of banks by the billions over the last few months, per CNBC, and it started long before Silicon Valley Bank’s issues surfaced.
This is a serious issue for many banks because those deposits are a major competitive advantage; banks can offer very low mortgage rates to borrowers because their “cost of funds” are so low, partially because they had to pay so little (or nothing at all) to retain those deposits.
But, now that depositors are fleeing banks for Treasuries or money market funds, banks are going to have to start paying more to retain depositors and that will in turn force them to raise their interest rates (which we have seen already in some cases).
In addition, some banks are pulling out of the mortgage market altogether already.
To be clear though, many commercial banks remain very competitive and are still offering very low rates.
My point is only that I would not be surprised to see things change in a hurry, given what is taking place in the world of banking and given how fast we have seen events turn in the past as illustrated by my stories above.
So, I am not trying to spread false concern; I am merely warning borrowers and agents to be ready to find alternative financing in a hurry, as these issues can come out of nowhere and surface overnight.
Borrowers relying on commercial bank financing should either have a backup pre-approval or backup lender that can move very quickly if their financing disappears.
Things seem to be relatively calm now, but the likes of Jeff Snider and other macro analysts expect a lot more problems to surface over the next six months.
FHA to the Rescue!
Quick story: a borrower came to us recently from another lender. He had been offered conforming financing at 6.375% at the cost of $10,000 in points. We instead offered him FHA financing at 5.875% at no points and with lower MI, and he jumped for it. This is just another reminder of how much more competitive FHA is now.
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