Why the Silicon Valley Bank Crash Matters
For those of you who are not familiar with Silicon Valley Bank, it was a bank headquartered in Santa Clara, California that provided financial services to technology and life science companies, as well as venture capitalists, private equity firms, and other investors. It used to employ my son, banked my husband’s technology company, and most importantly, it failed spectacularly last Friday. I realize that many of you may be thinking that there is no room for a tech bank in this blog, but believe me, the implications of the bank’s failures are going to be felt for a long time in the real estate market.
So, what exactly happened?
This entire mess began with the pandemic, and the lower interest rates introduced by the Fed. As a method for keeping the economy from imploding, we traded one good thing, investment and cheap money, for a bad thing, future inflation. As the pandemic started coming to an end in 2022, high inflation pushed the Fed to increase interest rates. While this is good for lending institutions, like banks, it can also be detrimental in that banks like SVB typically have to invest in securities themselves so that they can pay client interest on checking and savings accounts. When interest rates are low, banks earn less interest income on the loans they have made to borrowers. This can lower a bank's net interest income, which is the difference between the interest earned on loans and the interest paid on deposits.
Additionally, SVB invested their deposits in various financial instruments such as bonds, which pay interest to the bank. During the period of low interest rates, the yield, and more importantly the value, on these investments may decline, which can reduce a bank's profitability and liquidity. This comes as a twofold problem since many of the bank’s clients are from the tech industry. In 2022, a lot of the money from the venture capital sector started drying up, and start-ups needed more of their money from their accounts to offset lower investments. Because SVB had very long term investments that were not yielding a sufficient return and clients that needed to withdraw money, the bank was forced to sell many securities at a loss to try to capitalize itself. This spooked investors and tech companies alike creating a run on the bank.
What does this have to do with real estate?
SVB was one of the largest mortgage originators for borrowers in the tech market and also one of the pillar banks of the innovation ecosystem. Short of financial system wide contagion, the failure of SVB is going to rattle financial markets for months to come. It will be harder for those tech entrepreneurs to refinance their mortgages given that the bank experienced a bank run. Additionally, it will be a problem for employees of companies that go bankrupt as a result of this failure to maintain homes that they’ve already purchased. These employees may experience difficulties during a bank run because the bank may be unable to provide the funds necessary to close on a mortgage or refinance an existing mortgage. This can also lead to a shortage of credit in the mortgage market, which can result in higher interest rates and stricter lending criteria.
Overall, a bank run can cause significant disruptions in the financial system, including the mortgage market. It is important for homeowners and potential homebuyers to stay informed and vigilant during times of financial instability to make informed decisions about their mortgages. It will be interesting to see how SVB tries to pivot out of this mess and how the Federal Reserve and financial ecosystem will react. At this point we’re still in the early stages of a potential rupture to the financial ecoystem.
