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Do Bank Failures Impact Mortgage Rates [Lending Update with Richard Advani]

Richard Advani

Richard Advani

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Video Transcript

Leah Collich: I’m Leah Collich, the director of Real Wealth Realty, and I am joined today by Richard Advani with Guaranteed Rate. Richard is one of our go to preferred lenders. I’m hitting record pretty soon after we’ve jumped on a call to talk about what’s happening in the financial markets and its impact to investors. I have the benefit of getting to chat with experts like Richard all the time and hear from their perspective what’s happening and what these headline events mean to our industry. I want to bring that conversation to you. Richard, I’m curious in your world, how has this week changed or not changed things for you?

Richard Advani: it’s changed things dramatically and contrary to what most people may be thinking, at least in the mortgage world, it’s been a good change. I’m sure everyone out there is aware of what’s happening. It’s all over the news. You can’t miss it. There’s been some major bank failures. I think as of last night, I was reading Credit Suisse had to draw $40 or $50 million from their parent bank in their country. There is a lot of turmoil happening. With that turmoil, sometimes it offers opportunity, especially as it relates to real estate and mortgages.

Leah: Well, that’s what I’m curious about. I know we had already started to see that rates were coming down. I think that was early to mid last week ahead of some of these official announcements of bank failure. I suppose the financial markets were responding already in our industry to what they were forecasting was about to happen. What was happening with rates as of last week and then after this announcement? I feel like the Fed must be just pounding the wall.

They’re at a bit of a stalemate. They’ve been trying to really throw the breaks on the economy, throw the breaks on housing, and now banks collapsing, that is bad news as far as they’re concerned. Maybe they can’t be as aggressive as they wanted to be to try to get inflation under control. How is that affecting our rates now? What are you seeing?

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Richard: Absolutely. For those of you at home that don’t know, fixed mortgage rates are generally tied to the 10-year treasury bond. What we saw, as we all know, right after COVID, we were used to our low-interest rates, and that 10-year treasury bond over the course of 2022 essentially tripled. It went from the low 1.1 range and it went as high as 4.5 towards the third quarter of last year. At the third quarter of last year, we really peaked out on interest rates. Investor rates were in the low to mid sevens.

It made it a little more difficult for us as investors, of course, to find opportunities. Basically, what happened after that is the 10-year treasury came down pretty sharply along with interest rates. For those of you at home who were actively following it, rates hit the low sevens and then moved all the way down to the high fives and low sixes for investors. Now, that 10-year treasury bond actually, as of the last 30 or 40 days, started rallying upwards again. Towards the middle of last week, it actually touched 4.0.

Keep in mind, it was hovering in the mid threes the whole time. Mortgage interest rates actually were moving back up towards that high they hit in the third quarter of last year, really all the way up until Thursday of last week. Then, of course, what happened? We heard about the bank failures. Generally, when there is unrest in the financials and banks and people are uneasy about their money, there’s typically a big shift from having assets in banks to bonds. What’s happened is as people are moving their money to the security of the bond market, the 10-year treasury dropped very sharply. We had a 6% drop on Friday, we had a 5% drop on Monday. On Tuesday, it came up 4%.

Today, it’s up a little bit but bottom line is from the middle of last week where we had a 4.0 treasury bond, till today, even with the little bump today, we’re at 3.5%, mortgage rates have come down very sharply. We were getting used to quoting high sixes, low sevens again towards end of last week. I was honestly getting a little nervous. I was like, You know what? We’re heading back up to those high-rate numbers. Boom, this is unprecedented. At least in the last 12 years, we have a reprieve on interest rates. We sent out an update, I think, on Monday, and we were at, with points, put the high fives to low sixes for investor deals. The crazy thing is, like I said, a week ago, they were close to half a percent higher.

Leah: It’s so interesting. I always try to back up and think about the macroeconomics of this and where investor capital is flowing, and that informs the rates that we can get. Mortgage rates have consistently or historically followed that 10-year treasury. That tells us that on the mortgage-backed securities market, mortgages are still considered a safe place for investors to put their money, right? That’s good news for us, people who are wanting to get into leveraged assets because the cost to us to borrow that money, to invest that money in the assets is more affordable based on that higher demand. Is that a fair explanation?

Richard: Yes, definitely. I think the big question right now, Leah, is how long is this going to last for? Is the market in a response mode to the shock of that one failure? Is this going to be a little more systemic? In turn, is that treasury bond going to rally back upwards within a week? What I can tell anyone watching this is if you’ve been on the fence or if you’re trying to refi or buy and you can get in the contract ASAP and lock these interest rates in, I would strongly recommend doing that because we don’t know what next week is going to bring.

It’s interesting because the conversation I was having with my clients a week ago and leading up to that was inflation is higher than expected, which means treasury is going to keep pushing up, Fed rates are going to push up, and rates are probably going to be higher as we move throughout the year. This has changed things a lot. I think it’s a unique opportunity. We’ll see in the coming weeks if it’s going to be a short term or long term reduction in that treasury bond, but don’t sleep in the meantime, I would say.

Leah: I’m not sure how this might be related, but as banks are maybe having to reassess their balance sheets and look at how they’re managing risk, is there a chance that we see ripple effects of that in mortgage lending? Do we anticipate seeing guidelines get more strict on borrowers, or does some of this access to capital start to go away or change for us?

Richard: Well, most of the transactions that you and I are dealing with, and our investors are conventional transactions, Fannie and Freddy, and obviously, as we all know, those are essentially government-sponsored entities at this point as of the last 12 years. I don’t see liquidity drying up or major guideline changes. If you look at real estate overall, real estate is still robust. There’s huge supply and demand issues. Nationally, we’re way under built, and that’s not going to change in the short term.

Also, people have more equity than they’ve ever had in their homes as well. I don’t think we’re going towards a tightening mortgage-wise because there’s not a lot of pressure on the mortgage market, at least at the moment.

Leah: Right. That’s a good reminder when you hear these headlines of the housing industry collapsing and home values collapsing. You’ve got to remind yourself that we are all on pretty good footing. The people who are forced to move and sell their homes is a small percentage of the housing market, but that churn might get caught up in a little bit of pressure. This made me think of something. It sounds like the conventional loan space, that’s backed by the government, that’s why maybe there is such a close connection to the 10-year treasury. Are you seeing a separation in private capital, like the DSCR loan products? Are those interest rates moving like the conventional rates are?

Richard: Unfortunately, they’re not. With the DSCR product, they typically adjust every month or two months, whereas conventional loans adjust daily. What we have seen, and those loans are a little more market and risk driven for the type of product they are. It’s an asset-based loan based on the cash flow of the property. Those loans have actually gone up about a % in the last two or three weeks.

We’ll see what happens with those DSCR loans. I potentially do see them going back to 25% down as a minimum. They do offer 20% down now. Potentially, there will be some tightening there because a lot of the funds and stuff that provide this type of financing obviously are going through this ripple in the market right now as well.

Leah: They might be preferring to go invest in bonds in the financial markets as opposed to mortgage lending. They can get a passive return in a secured asset, get 4 or 5% on their money for taking on very little or no risk. They’re preferring to do that as opposed to lending it out to a mortgage borrower.

Richard: Exactly.

Leah: Interesting.

Richard: Conventional wise, where all of us that’s the main product all of us are utilizing. I don’t anticipate major changes. It’s very important to read between the lines when you guys read these articles. I read them all the time. Headline is US Home Sales Drop, Second Month in a Row. Then you read the article and they’re like, “Okay, well, nationally since 2022, home prices are down 0.1%.” The same article.

Leah: It’s down.

Richard: Homes are up still substantially since COVID prior. The articles are very misleading. Now the percentage of sales that are happening has gone down. Yes. Who has a 2.8% mortgage that wants to sell their house and buy a new house at 7%? Not many of us.

Leah: Right. Richard, one of the reasons we love referring our investors to you is that you’re an investor too. You’re one of us. You’re in this camp of loving and being obsessed with the next deal and the underwriting of that deal. I’m just personally curious when you see what’s happening in the financial markets, are you changing up your strategy at all? Are you considering investing some of your liquidity into bonds as opposed to more real estate? What are you doing with your investments considering what’s happening now?

Richard: Absolutely. Obviously, we are biased because we’re in this industry and we know this industry, but this should offer some confidence to people that me being in the industry, not because I’m biased or jaded, but because I have the hard data. I don’t think there’s anything better to still invest in real estate. It’s tangible. it’s real. Stocks and all, it’s still paper money.

So is bonds, and as we’ve all seen, there can be some major external influences that overnight change the bond market. We’ve seen that rally that it’s had. I think real estate’s less volatile. To me, if you look at economics 101, the major basis for anything financial-related is supply and demand. I got the article up here in the background, CNN business March 8th. We are 6.5 million homes short nationally.

If you look purely at supply and demand, I’m definitely long real estate. People are living longer, there’s not more land being created. I don’t see there being a more safe and secure place to put your money in. The interesting thing is we’re seeing that. There’s a whole new class of investor that has been coming into us, which is people that are– They don’t even care about ROI. They’re going to put 60% down on the home because they just want a safe place to park their money.

The super affluent, while everyone else– People even who have 15, 20 properties like us, they’re still shying away and like, “Oh, let’s see what happens.” The super-affluent people are coming in and buying up as much as they can. Once again takes you to tangible, real, supply and demand. The external factor. Real estate’s so robust and the feds say it in their meeting, real estate is so robust right now we’ve got to artificially push up rates to combat inflation. Yes, but also to cool the housing market. What happens when rates come back down? We’re back to craziness that we’ve had because there’s not enough homes.

Leah: Right. That’s so well said. I think this bank situation though we’re being told is not a situation. It does have people, I think realizing their exposure, especially people who have a lot of cash in a bank and we’re better to go and put that money that would maybe otherwise not be insured or exceed the insurance amount in a bank. Go put it in a hard asset. I think that’s what the super-rich are asking themselves. [chuckles]

Richard: The last thing I would say is if you own a home, and there’s a change, you can always go take the keys to your home. You can sell it, you can live in it, you can do whatever you want. If you have $5 million at a bank right now, $4.75 million of that could be gone because it’s not FDIC insured. Think about where a safe place is. To me, a safe place is something that’s real, something that I can touch, something that I can feel, and something that I can access when I want to access it.

Leah: Well said. Richard, thanks for hopping on a call with me. We’ll get your contact information here up on the screen, so if anybody wants to reach out to you for any of their lending needs, they know how to get in touch with you. Again, Richard’s one of our go-to preferred lenders. He’s licensed in all the different states where we have property teams, so I know he’d be willing to help you out with your next purchase. Thanks, Richard.

Richard: Thank you.

Richard Advani
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