A CFO for a midwestern bank was screaming in my ear! His anger was palpable and all I did was bring up First Republic Bank…
10% Down Jumbo
But, before I explain why that happened, I want to mention that mortgage banks like JVM Lending are the only game in town with10% down jumbo financing. The big commercial banks are nowhere to be found.
The rates for these programs may seem a bit high, but that is only because they all come with no private mortgage insurance or PMI. But it is too difficult to get PMI for jumbo loans, so investors who buy these loans from us just “self-insure” the loans with higher rates.
Back to First Republic Bank…
In the fall of 2022, I was contacting commercial banks to see if they wanted to buy low-rate jumbo loans from us in exchange for us getting the borrowers to deposit large sums of money in the bank.
In other words, we would ask the borrower to deposit $100,000 or purchase a CD in exchange for a below-market interest rate.
This is something First Republic did for years, and it is something we did too on behalf of various investors we sold loans to.
Up until 2022, jumbo loans were over 50% of our business, and First Republic was our biggest competitor.
But when Wells Fargo announced that they would stop buying loans from mortgage banks in the fall of 2022, we lost our best outlet for low-rate jumbo mortgages.
So, I was trying to find a new outlet by calling smaller commercial banks all over the country to see if they wanted to buy loans from us for very well-qualified buyers – who would also agree to make large deposits.
When I would chat with them, I would bring up First Republic’s model of offering below-market rates to high-net-worth clients – and I would get an earful every time.
The worst though was from a CFO with a Chicago-based bank that has a pretty good-sized mortgage division.
He started to scream that First Republic’s model was not viable in a rising rate environment – and how it would not only foster losses, but it would likely be the demise of the bank (he was angry because he had to compete with the model).
He explained it in such detail in fact that I pulled our own sizable chunk of deposits from First Republic the next week (yes, we were very happy customers – even though they were an evil competitor).
And sure enough, they did go belly up the following spring.
I share this because I occasionally get asked by high-net-worth friends and clients if there are banks like First Republic coming back into the market.
And my answer is probably not unless someone wants to lose a lot of money…
First Republic Was Killing It … as Long as Rates Stayed Low Forever
When First Republic was giving away free money in a very low environment, they were killing it.
But, when rates suddenly rose, they had to start offering returns to their depositors – but they were not generating enough interest income from their low-rate loans to do so.
In addition, the loans and the Treasuries they held on their books were suddenly worth a lot less after rates rose (a $1,000 bond purchased when yields are under 2% will be worth much less than $1,000 when yields shoot to over 4%).
So, First Republic couldn’t afford to pay higher yields to depositors, and they couldn’t sell enough assets (loans and bonds) to generate cash because their assets fell so much in value.
Depositors started to leave the bank for other banks that offered higher yields. Then rumors started that First Republic was having troubles and that sparked a “bank run” which is much easier in this day and age when someone can withdraw all of their money with a few clicks on a phone. In the old days, bank runs actually required running to the bank…
Depositors were particularly nervous because many of them had deposit amounts that vastly exceeded FDIC insurance limits.
But, when the government found out that many of those uninsured depositors were large political donors, they immediately stepped in and made sure everyone was made whole (especially the uninsured political donors)
So, the moral of the story is … I withdrew all my money for no reason… Sigh.
The other moral is if you’re going to deposit money in a risky bank, make sure it is politically connected.
Small banks in the heartland were left to swing in the wind…
