Why Banks Fail
Why is a man like a zero coupon bond? They pay little interest, and have no maturity!
And roughly 85% of bank deposits have a maturity of 3 months or less. Given that, banks must carefully watch the amount of fixed rate loans and fixed rate securities going onto the books to limit the risk to rising interest rates. The difference between interest a bank pays its depositors (about 0%) and interest it earns (say on a 5% mortgage) is a huge part of a bank’s income. But it was not enough to overcome difficulties for four more banks last week, as the FDIC shut them down. In Florida Sunshine State Community Bank was sold to Premier American Bank. Peoples State Bank was sold to First Michigan Bank up in Michigan, in Wisconsin Badger State Bank is now part of Royal Bank, and out in California Canyon National Bank was sold to Pacific Premier Bank.
FHA Mortgage Insurance Going Up Again
“As part of ongoing efforts to strengthen the FHA capital reserves,” and to help push private money back into mortgages, the FHA came out with a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (.25) on all 30- and 15-year loans starting in mid-April. (The upfront MIP will remain unchanged at 1.0 percent.) The increase adds $30 to the average borrower’s monthly payment and in total is estimated to add $3 billion annually to the FHA’s Mutual Mortgage Insurance Fund. It is the second increase since October.
From an investor’s viewpoint, any investor holding Ginnie Mae securities just became much more comfortable with their holdings and with the odds of FHA-to-FHA refinancing going down. Those familiar with FHA loans realize that before October a 95% LTV 30-yr loan paid a 225 basis points up-front MIP with a 50 bps annual MIP. Now, that loan pays 100 bps up-front — but 110 bps annually. Investors believe that this change, given current rates, effectively removes any 5% and 5.5% FHA loans from being refinanced into new FHA loans.