Interesting Nuggets from First Republic Bank’s FailureBack to home
Today the FDIC announced that JPMorgan Chase Bank is assuming the deposits of First Republic Bank. The bank failed, it was seized by regulators, and the FDIC struck a deal with JPMorgan for the latter to acquire the bank. First Republic has been in the news for the last few weeks since the SVB failure, so this outcome isn’t surprising given how many weeks have passed.
Banks are complicated, and I’m not knowledgeable about the industry. But one thing caught my attention as I learned more about the First Republic situation. According to a Bloomberg article, First Republic catered to the wealthy and lured them to the bank with attractive mortgage products. It reportedly offered wealthy clients mortgages with up to 10 years of interest-only payments. Combine this with the rock-bottom interest rates of 2020 and 2021, and the bank saw a flood of wealthy clients take out mortgages. A few interesting points from the article:
- In 2020 and 2021, First Republic originated $900 million of interest-only mortgages in two small sections of Beverly Hills, California. Said differently, they originated almost a billion dollars of interest-only mortgages in one neighborhood. Beverly Hills has some of the most expensive residential homes in the country, but that’s still an incredible data point.
- First Republic originated more than $19 billion of interest-only mortgages in just three metro areas: San Francisco, Los Angeles, and New York. Again, all these areas have some of the highest prices for residential homes in the country, but $19 billion is a staggering amount of interest-only loans in three cities.
- $58 billion worth of First Republic’s loans at the beginning of the year were interest-only, and the majority don’t require principal payments until 2028 at the earliest.
- At the beginning of the year, the bank estimated that the mortgages it made were worth $19 billion less than their carrying value if sold at that time, and it had a $4.8 billion loss on its bond portfolio (bond losses sank SVB).
To be fair, there’s nothing wrong with interest-only mortgages. They’ve been around for a long time and, when used responsibly, can be a viable financing product for responsible borrowers. First Republic appears to have offered this product to borrowers with the highest credit scores who also earned high incomes. These loans may have been a great product for borrowers, but they weren’t so great for First Republic. I’m not sure about many of the details of these loans (fixed, variable, etc.), but the meeting of low rates on many of these interest-only mortgages with rising interest rates and strong deposit withdrawals appears to have contributed to a perfect storm for the bank.