How will First Republic's failure impact the mortgage market?

The failure of First Republic Bank could restrict jumbo mortgage credit availability if balance-sheet lenders pull back from this business.

However, the bank's niche in working with high wealth clients meant its residential mortgage business didn't often compete with other jumbo lenders.

For example, First Republic offered many interest-only mortgages and it was willing to offer rate discounts or down payment credits based on the borrower's deposit relationship.

"It's a very different lender from kind of everyday Main Street lending or even just everyday common jumbo lending," said John Toohig, managing director and head of the whole loan trading group at Raymond James. The biggest effect might be in certain high value metro areas, including the New York City area and parts of California and Florida.

But while First Republic was willing to make loans that other lenders weren't, the credit quality of its production was excellent.

"There was very little credit risk associated with their loans, their performance," Toohig said. "Even coming out of the Great Financial Crisis in 2008, which was very housing-oriented, [the portfolio] was absolutely pristine and stellar."

In the last two years, First Republic had a median loan size of $900,000, with a median loan-to-value ratio of 60% and weighted average credit score of 769, its 10-K filing with the Federal Deposit Insurance Corp. stated.

While the company did sell on the secondary market, the filing noted that over half of its loan portfolio consisted of single-family mortgages, primarily adjustable-rate.

Its total single-family mortgage loans held on the balance sheet, including home equity lines of credit, ended 2022 at $101.5 billion, or 61% of the full portfolio.

Last year, it originated $31.91 billion in single-family mortgages, along with $2.64 billion in HELOCs and $1.58 billion in residential construction loans. In 2021, First Republic produced $29.58 billion, $2.44 billion and $968 million respectively.

But First Republic's failure may create a hole for a certain corner of the market, since many other lenders are not willing to lend up to $5 million on a residential property because they lack the comfort with that level of credit.

For example, published reports said Meta Platforms CEO Mark Zuckerberg got a 1.05% mortgage from First Republic on a nearly $6 million home in 2011.

Toohig argues that Wells Fargo exiting the correspondent lending channel has a bigger impact on the mortgage market than First Republic because of the latter's niche play.

Acquiring First Republic will help JP Morgan Chase to build its wealth management business, something its CEO Jamie Dimon has stated he was looking to increase, Toohig noted. That gives the bank the opportunity to cross-sell other services, including mortgages much like First Republic had. 

Furthermore, JPMorgan Chase may have been one of the few potential buyers willing to play in the superjumbo mortgage sandbox that First Republic did.

Banks typically portfolio their nonconforming loans, including jumbos, and that is one of the reasons pricing can be volatile.

The turbulence is likely to result in banks being less willing in general to put jumbo loans on their books, said Odeta Kushi, deputy chief economist at First American Financial.

"Lenders may tighten lending requirements for these balance-sheet products," Kushi said. "By tightening credit and limiting the number of jumbo loans they originate, banks can reduce their exposure to credit risk and conserve their cash, if needed."

But if these lenders do restrict credit, it could affect the jumbo market in certain regions, leading to fewer home sales in certain upscale market segments, both Kushi and Toohig said.

In a normal environment, conforming mortgages should be cheaper than jumbos. But data from Optimal Blue, a division of Black Knight, shows the rates switching positions on multiple occasions, starting from the end of January.

As of April 28, the conforming mortgage was averaging 4 basis points lower, at 6.447%, versus 6.487% for the jumbo. The data is based on the rate locks done through the product and pricing engine and loan-type volume helps to explain some of the volatility, said Jim Glennon, vice president of hedging and trading client services.

On the other hand, the latest Mortgage Bankers Association Weekly Application Survey had jumbo loans at 6.4%, while conforming mortgages were priced 15 basis points higher at 6.55%.

The rate inversion between conforming and jumbo first popped up a couple of years ago as depositories were pushing a relationship strategy and so they kept the latter type of loans in their portfolios.

But the spreads between the products began to tighten last year, well before the start of the current banking crisis, Glennon noted. Anecdotal reports say that the banks' portfolios were getting quite full.

"The money that was earmarked for those types of loans had been exhausted," Glennon said. "So the market started shifting back towards a bit more parity [on rates] between conventional, government and nonconforming or jumbo."

As a result, chatter about a securitization exit for jumbo has been getting louder. That has led companies like Redwood Trust to see themselves benefitting from the regional banking turmoil.

Since the Silicon Valley Bank failure, depositories have been more wary about putting mortgages and other assets on their books and they're looking out for any asset-liability duration mismatch, Glennon added.

But right now, Optimal Blue's data has not and is not showing any impact of the bank failures, going back into March.

For Melissa Cohn, regional vice president at William Raveis Mortgage, the change, if anything,  creates a more level playing field because it takes out someone that was offering below market rates in return for the relationship.

"I don't have a sense from any of the banks that I work with that the First Republic failure will impact them or their lending," said Cohn. "I haven't seen anything with regards to tightening of credit."

The benchmark 10-year Treasury yield was up 12 basis points from its close last Friday, but Cohn attributed that more in anticipation of the Federal Open Market Committee meeting this week, where it is expected to raise short-term rates by another 25 basis points.

Andrew Martinez contributed reporting to this story