A jumbo mortgage is a type of loan where the amount borrowed is higher than the conforming loan limits set by the Federal Housing Finance Agency (FHFA). It is normally set above $726,000, although it can be as high as $1 million.
This type of practice is at the very origin of First Republicwhich became famous for providing rock-bottom-rate mortgages to high-income borrowers with exceptional credit scores.
As published by the Bloomberg agency, the demand for these loans increased during the pandemic when wealthy buyers sought mortgage deals that would allow them to keep most of their money in higher-yielding investments. The rush helped First Republic double its assets in four years. And now it has contributed to its collapse.
Earlier in the week, JPMorgan Chase agreed to acquire First Republic from the Federal Deposit Insurance (FDIC). Just weeks earlier, the biggest banks on Wall Street had stepped in to prop up the bank with their own cash, but the efforts fell short.
On April 24, the bank confirmed the worst fears of the market. Deposits had plummeted by $70 billion, nearly half the bank’s total, in a matter of weeks. Its share price, already down 87% this year, went into another free fall. The First Republic takeover marks the second-biggest bank failure in US history and the third this year, following the failures of Silicon Valley Bank and Signature Bank in March.
At the center of First Republic’s balance sheet was a $137 billion problem that made it a particularly difficult sell: a giant book of those low-interest jumbo mortgages, mixed in with a few others, whose value had taken a serious hit since the Federal Reserve started raising interest rates. At the beginning of the year, the bank had estimated that its mortgages would be worth about $19 billion less than face value if sold. He also had another $8 billion or so in writedowns on other loans, as well as unrealized losses on bonds.
In other words, that $27 billion in unrealized losses completely wiped out the company’s $13 billion in tangible common equity.
2023-05-03 10:25:23
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