Turmoil in banking industry has had little impact on day-to-day lending, LOs say

The turmoil in the banking sector, which saw midtier Silicon Valley Bank and Signature Bank implode, has resulted in borrower unease, but thus far has had very little actual impact on the day-to-day of mortgage lending.

Those working in the industry say it has been business as usual, with two exceptions: interest rates have declined and borrowers have expressed concerns about what the bank failures could mean for the economy and for their home-buying journey. 

"It's never good to see banks fail," said Breon Price, branch manager at UMortgage. "But for the average consumer [that is looking to buy a home], you're not going to see much impact because they don't invest into crypto."

An event that would have significant ramifications on mortgage lending is if a big depository institution, such as Wells Fargo, JP Morgan Chase or Bank of America, runs into financial trouble, a handful of loan officers said. 

Meanwhile, mortgage professionals are watching to see if turbulence in the financial markets will continue to put downward pressure on rates. As of March 16, interest rates came down 15 basis points to 6.6%, according to Freddie Mac's most recent survey, marking the first decline in over a month. 

"Our clients are not expressing fear of the bank failures, at least in regards to funds on deposit," said Randy Howell, president at Mortgage Power, Inc. "Rather, they are talking about what impact it will have on the interest rates for mortgages. The more the Feds intervene [by raising the Fed Funds rate], the more likely we'll see rates continue to rise."

The Federal Reserve is expected to announce what will happen to mortgage rates today.

"We've all pretty much priced in the reality that they're going to raise another 25 basis points," said Michael Borodinsky, vice president and branch manager at Caliber Home Loans in Bridgewater, New Jersey. "That's not so much what the concern or uncertainty is about. It's what Jerome Powell says. What is he going to say in terms of what the future course of Fed action is going to be? Everybody's going to look for a pause after this."

With fresh announcements of more layoffs at Amazon and continued cutbacks in the tech sector, Borodinsky said he expects job reductions to spread and for interest rates to drop by one percent in the next six to nine months.

"Recession comes back into play as a possibility of the economy," he said. "The beneficiary of all that negativity, is that it's going to mean good news for interest rates. That will be good news for affordability and good news for the housing market."

So far, potential homebuyers have not been impacted by events in the banking industry, though some have started to express worry that instability in the banking industry will result in a market crash, said Christian Hernandez, vice president of mortgage lending at Guaranteed Rate.

"There is so much uncertainty right now with higher rates and inflation," Hernandez said. "Some customers are worried that the market will crash, and they are afraid to buy, while others are waiting for the market to crash as they feel that they will be able to snatch an outstanding deal as they predict there will be many foreclosures to follow and then it will be the time to buy."

Regarding banks failing, the mortgage industry will only feel a significant pinch in the event that instability spreads to big depositories and "then we are in big trouble," said Alex Naumovych, loan officer at Draper and Kramer Mortgage Corporation.

"For now, the recent bank failures have helped to lower mortgage rates, but if the big banks crash it may be a repeat of 2008 where everyone will get scared and stop giving loans," Naumovych added. "It would make it harder to get any type of loan including mortgage, car, or personal loans."

Executives running IMB's recently expressed confidence in their depository lending partners, but that could quickly change, Price said. If the banking industry experiences instability on a larger scale, "going out and getting new warehouse lines is going to be more difficult and that's how it might trickle down to the mortgage industry," he added.

"As a result, we may see a trend where messier loans', such as big statement loans, DSCR loans and renovations loans go away, just like during the pandemic, because those are the loans you have to keep on your warehouse lines the longest," he added.

- Heidi Patalano contributed reporting to this story.