The dramatic government takeovers of Silicon Valley Bank (SVB) and Signature Bank and the imperiled position of First Republic have led to a crisis of confidence in the banking system. Despite the government’s actions to shore up the system and regain confidence, the impact on the construction business and home mortgages has yet to be determined.
The direct impact of SVB’s failure on construction should be insignificant, except that other regional banks are going to be more likely to tighten credit lines and qualifications. The overall confidence in the banking system could potentially create greater hazards down the road though.
So far, the banks that have been in trouble have engaged ins specific business practices which piled on too much risk with too little diversification. Most of the largest banks are actually in a very solid position due to the fact that they are still subject to the Dodd-Frank Act, which specifies capital reserve amounts and provides government oversight into banking practices.
In 2018 President Trump signed the biggest rollback of banking rules since the big financial crisis of 2008. The bill rolled back Dodd-Frank protections for all but the largest banks. One of the most active political entities lobbying for the pullback was Silicon Valley Bank.
In SVB’s case, the changes allowed them to pursue an ill-fated strategy demonstrating the risk of a lack of diversification.
SVB courted high-tech startups and required that they do all of their business with SVB. Then while very flush with money, they put almost all of their cash reserves into long-dated government securities. Then the Fed started its year-long policy of aggressive interest rate hikes in order to control inflation. So SVB’s customer base was not diversified, and their investment portfolio was not diversified. This led to a perfect storm for the bank.
As interest rates rose and borrowing for tech start-ups became too expensive for the companies, more tech companies had to lay off employees and downsize, meaning they needed to draw on their deposits. SVB was holding mainly long-dated securities, and in order to raise money for depositors to withdraw, they had to sell those long-dated securities at a loss.
The Construction Industry’s Concern
The failure of these banks had no direct impact on contractors, but contractors should expect tightening from regional banks.
“[It’s] important for construction companies to build cash reserves and maintain a certain level of liquidity,” said Greg Ross, industry managing partner at Grant Thornton, a Chicago-based accounting firm. “Make sure you have some diversity in your investments where you are able to react quickly.”
Anirban Basu, ABC chief economist said:
“With the likely tightening of financial conditions given the growing stress on America’s banks and ongoing efforts by the Federal Reserve to rein in excess inflation, commercial real estate and construction are likely to weaken further during the year ahead,…The current moment is, above all else, defined by uncertainty.” *
Meanwhile, the uncertainty has led to a possible silver lining with mortgage rates. In spite of a weak spring home buying season, the last week has seen mortgage interest rates decrease.
Rocket Mortgage, a large loan originator, quoted 30-year fixed-rate purchase loans at 6.5%, down 0.25 percentage point from the day prior. Mortgage News Daily’s Friday survey pegged the average rate on a fixed 30-year mortgage at 6.76%, down 0.24 percentage point from the day prior. The declines come with the release of February’s mixed jobs report and news of the failure of SVB, which may have sent the 10-year Treasury yield lower. **
The Fed’s decision on Wednesday to raise rates by 25 basis points instead of 50, along with commentary suggesting it might be done tightening, means that better days may be ahead for mortgage interest rates.