Which banks will fail next?
Banks are not showing losses on mark to market adjustments for commercial assets and securities they hold to maturity. What is surprising is that the consumer in US is fine with low interest mortgages, while the average yield of securities is 2% on banks and issuers books, which causes securities to be underwater.
Who has the most risk?
1. The issuers on reverse mortgages in the high rate environment, as an example, Reverse Mortgage Funding, LLC (RMF) went down early in the year. Cherry Creek Mortgage became a subsidiary of Guild Holdings Company in March 2023. Market is closing watching FAR, AAG, and other issuers that need to pay the borrower money in the high rate environment.
2. Issuers on commercial mortgage paper.
While SBA is writing off losses as a government, Commercial Lenders do not have the same luxury
The top 10 commercial/multifamily mortgage originators in 2022 were Jones Lang LaSalle Incorporated (JLL) - 50% down, CBRE (30% down), PNC Real Estate - down 50% from the peak, Goldman Sachs, who was the first large institution to mark- to market commercial assets.
More commercial banks that we stopped hearing about, since failure of SVB and Signature Bank:
Regions Financial Corporation - 40%
Huntington Banc - 40%
Comerica Incorporated - 40%
Zions Banc - 40% .
3. NY-based banks
- NY state put a deep freeze on mortgage market, due to state regulations.
- Top originators in 2020-2021 in NY were:
- Santander Bank
- Goldman Sachs
Some of the NY midsize, smaller banks are: New Millennium Bank, Freedom Bank, Regal Bank, Sterling National Bank, Unity Bank, 1st Constitution Bank and Empire State bank.
There is no appetite for M&A in New York. If FDIC will take over the NY Based lender, they will have to hold them on their books and discount 20-50 basis points in the asset sale.
4. Condition for Next bank to fail
Term funding program was established to give liquidity to the troubled banks is coming to the end. While there is a discussion of TARP 2.0, with dysfunctional government, no spreaker in the House, government shutdown in November, the help to banks can be delayed.
The Bank Term Funding Program announced by the Federal Reserve Board in March 2023, offered loans of up to 1 year in length
to banks, savings associations, credit unions and other institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities and other qualifying assets. The program ends on 03/2024.
Currently, there is No impulsive decision by consumer to withdraw, and the consumer panic came down from Q1 of 2023. The problem however is not fixed, you still have a bandaid on the volcano.
In Worst case scenario, there would be no extension to TARP due to government shutdown or no additional budget program for banks, causing a bank run again, due to more bank failures from the list I presented in this video.
Uncertainty on interest rates, uncertainty on government actions, geopolitical uncertainty, and possibly failed banks all will result in FEDs being forced to lower interest rate fast in 2024.
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