Banks Required to Carry More Cash Capital Will Increase Rates

[Caroline Gerardo]

Basel III requires bank lenders to hold greater reserves. What does this mean to you as investor? Price increases. The cost to carry cash for banks to appear solvent will be passed on to you as a consumer. The interest rate and points investors will pay for mortgage loans will increase.

https://www.americanbanker.com...

(first article is free I didn't write this one.)

It means you need to have a mortgage broker in your phone contacts for every state you own property. Shopping for a loan will be more complex.

[Caroline Gerardo]

1. To avoid having more banks go bankrupt this is a requirement for these companies to come up with more capital in reserves. The Federal Reserve Act Requires that member banks subscribe an amount of capital equal to 6 percent of the member bank's capital and surplus. Reserve ratios historically ranged from zero to 10% of bank deposits. Thus if a run on the bank happens in some disaster or panic they can give cash to some small portion of the depositors. Banks made money in the past loaning out the $$$ in deposits. 

2. Banks will increase mortgage rates and the points and fees they charge to increase their cash needed. Costs are passed down to consumers. Investor loans are seen as high risk today and these will bear the hardest measure of increase. Jumbo loans for owner occupied may also increase as this group was a profit center for banks who wanted to move towards private banking for the wealthy. Jumbo loans are viewed as lower risk than investor loans. Jumbo is not subsidized by our government as GSE/Fannie/Freddie/FHA/VA/USDA are.

3. Some banks have gotten out of mortgage lending - Wells has pulled out. Many mortgage companies closed/filed bankruptcy. More will close/pull out. Regulations keep coming, costs greatly increased, and less profit for all banks/lenders/nondepository lenders. Your choices as a consumer are shrinking. Greater than 1.4 million people have been laid off and moved to other sectors. 

4. Lenders are licensed state by state. Independent mortgage brokers/lenders have to take the classes/pay the fees/pass the muster in each state. You see lots of "lenders" on BP who are not licensed. Commercial loans do not require license and some of these lenders say they only broker non owner occupied not consumer loans. 

To get a conventional loan the person talking about rates or suggesting loan products must be licensed to do any owner occupied/second home/ HELOC/government type... Big banks carry licenses in many states and operate differently than non-depositing lenders. The guy in the bank branch sells mortgages, auto loans, and is paid less than the non-depositor as they get walk in clients. A bank Underwriter follows the ins and outs/ overlay regulations that the bank dictates and they rarely make exceptions. That guy in the branch is often what I call "beginner platform". After this increased pressure on banks the bean counters will be more careful to be profitable. (You see in the news banks getting fined.) A community bank or credit unions operate under different shades of rules, often only licensed in a region not Nationwide. Then there are the many types of non-bank lenders. Knowing who you are, what the property type/use is, location of property, and your goals will determine what category of lender you need to have on speed dial.

Talk with a couple different lenders to find your marriage match. Built your team with: Lender, Attorney, CPA, insurance agent, Realtor, wealth advisor... you need a team of people who can honestly answer a question and point you to the person who can fix your problem.  

I've been in the mortgage lending business thirty years and seen it all. This tightening will pass. Nothing stays the same.