Many folks are currently focused on the debt ceiling negotiations and seeing if congress can get their collective act together to stave off an unnecessary financial train wreck. There has been a lot written lately on the debt ceiling as it’s the most recent major news item to captivate our attention and with good reason – failing to make a deal there and throwing the US-backed debt into default could cause major strain on our already fragile economic system. That being said, I expect that will get resolved as it’s in the best interest of all politicians to do so. For the purposes of this missive, I am going to assume that gets worked out and focus on what may have been relegated to a distant memory: regional banking failures.
It was just a couple of months ago that it was announced that Silicon Valley Bank would be seized by the FDIC. There have been other failures since then, though the bulk of the troubled banks have been able to stave off collapse in the time since those headlines in early March. A myriad of articles have been written on the subject, but few have boiled it down to the simple Why of the collapse and What it will mean to those who interact with the banks.
Here’s the quick why: Banks have a somewhat reversed balance sheet to many of the rest of us. While we see cash on our books as an asset, banks see our deposits as a liability. In essence, we are loaning our cash to the banks to hold and they owe us that back if we ask. In order to make sure that they are solvent (ie have a positive equity balance), they need to convert those liabilities into assets. Those assets take the form of loans that banks make or securities that the bank purchases that earn the bank income. Now, since the Fed has raised interest rates at the fastest rate (in percentage terms) in history over the past year, some of those loans and securities that were purchased/originated in, say, 2020 at low-interest rates are now worth a lot less. This creates a situation where the assets on the bank balance sheets have become less valuable versus the liabilities that they were purchased with (our deposits). So, if we all want to pull out our deposits at once, the bank has to sell their securities/loans which are not as valuable, and eventually, they will not be able to sell their assets for enough to cover returning all the deposits. At that point, the bank is sunk.
You may be asking, “Ok, I get all that. And I don’t have any deposits in SVB, so who cares?” That’s a good question. If you are a real estate owner who is buying, rehabbing, improving, expanding and selling assets, then you just lost a major source of capital for a little while. Banks are a complicated network of interconnected entities that loan to each other on a regular basis. They also buy and sell loans to each other as well as all kinds of other transactions. As banks begin to fail, there are less participants to buy, sell and loan with which lessens the ability for banks to be able to add assets to their books via originating loans. And that is where we care. As real estate owners, we are always looking for good loans to help invest in our properties, purchase properties, refinance our existing properties and for our buyers to get good loans on what we are selling (so that we can get higher prices). At this time, many banks are increasing the cost (interest rate) of their loans to make up for the low asset values on their books, being more selective or out of the market entirely. That’s a big blow to us as real estate owners as banks make up an integral part of the lending capital for our properties.
So, now what? The good news is that there are still options out there. Non-bank lenders such as debt funds, insurance companies and agencies (Fannie Mae and Freddie Mac) are still lending and many are hungry to do so. At BWE, we have built our business on making sure we have a bead on all the options that exist in the market and helping source the one that best fits every business plan. Whether that’s us as a lender (in the case of Fannie Mae or Freddie Mac) or us sourcing another avenue, it’s times where there are less sources of good lenders around that it helps to have an experienced guide to help procure the right loan for your situation. The banking crisis isn’t over yet and we may be in a tenuous position for a little while, be sure to reach out if you have any questions as to what is out there and how you can prepare for the next time you need a loan for one of your properties.
For more information get in touch with MJ Vukovich here: https://www.bwe.com/people/MJ-Vukovich