How Does the Current Banking “Situation” Impact the Mortgage Business?

We’ve seen rates creeping back up again, and one reason is because of the current banking situation/crisis that is happening. How do these two things relate? Many people think of banking and mortgages in the same category, and they kind of are. But what is the direct impact here?

Long story short: banks lend out deposits, and they do it on a leveraged basis. For example, they will lend out 10x what they are holding in deposits. So, if all of a sudden there is a “run” on withdrawals because people want cash, then the bank will run out of cash quickly – and this is what is happening.

In a few cases, such as with Silicon Valley Bank, word got out that the bank was in trouble, so everyone went to the bank to withdraw their money as quickly as possible. Then the bank ran out of money and it was one of the biggest bank failures in US history.

There are other ways this can happen as well. For example, some people are withdrawing from the bank in order to use the cash to buy treasury notes (which offer a higher return on investment compared to the savings rates offered by banks right now). This example is another reason why a bank might run into trouble.

How Banking Issues and Mortgage Rates are Connected

This is where it starts to tie into the mortgage side. Banks only have so much on their books in order to raise liquidity. They also have treasuries, which are all under water right now – but banks sell these treasuries at a loss in order to get the cash needed.

As a result, it creates more supply in bonds/treasuries, which brings the prices down. And when these prices come down, then rates go up. That’s what we are seeing right now. There are specific, big trades that are happening to cause these fluctuations and affecting mortgage rates.

These banking trends are a big part of the reasons why we aren’t seeing rates come down – one of many economic factors.

What Will Fix the Mortgage Rates?

What fixes this? When the Fed stops increasing rates, or starts decreasing rates, then it can help the situation. But the other side of that is the balance of managing inflation.

Rates seem to be stickier than what we were expecting. But I continue to believe that it’s still a great time to buy, even though rates are high. If rates come down and buyers flood into the market, then we are going to run into a huge inventory problem. If you’re thinking about buying, then now is the time.

If you need personalized mortgage advice for buying a home, then reach out to me any time. I’m here to help!