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A bank failure, a panic, and a race to close on a home

As the financial world watched the second- and third-largest bank failures in U.S. history unfold, Jeff Reynolds worked to save a home purchase backed by a mortgage from First Republic Bank (FRC) whose shares plummeted amid the chaos.

Over the weekend, Reynolds, a real estate broker in Seattle, moved the closing for his buyer to Monday instead of next week, worried that the bank could be the next to collapse.

“It was wild, we moved up closing, and suddenly all morning trading was halted,” the broker with Compass and founder of UrbanCondoSpaces.com told Yahoo Finance about Monday morning.

The San Francisco-based bank’s stock plunged 70% shortly after the opening bell on Monday, as investors dropped First Republic’s valuation by $10 billion within minutes, prompting an abrupt pause in trading.

At stake for Reynolds’ buyer was an 10-year adjustable-rate mortgage loan with an interest rate of 4.75% that his client locked in mid-January, when mortgage rates were notably lower.

If First Republic shuttered and the loan was lost, the 45-day closing period would have been a waste. His client would have to get another lender to approve the loan — ultimately losing that coveted lower interest rate.

The loan, though, did close. First Republic was still standing.

“To think that a prospective buyer might not get their loan, that’s how close it hit home for me,” Reynolds said. “Because there was so much volatility in the stock, I thought there was a chance maybe — that even regardless of the backstop — the bank may have failed, but thankfully it didn’t.”

What Reynolds experienced could play out again as stocks of many regional banks that originate mortgages continue to get clobbered this week. The key, Reynolds said, is to act fast.

“If you wanted to take the risk away when dealing with a liquidity event, you close,” he said. “Because if the mortgage is then owned by the bank, whoever would buy that bank would choose to service that loan.”

A person walks past a First Republic Bank branch in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. REUTERS/Mike Segar
A person walks past a First Republic Bank branch in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. (Credit: Mike Segar, REUTERS)

But those buyers in the beginning of the process, who may have locked a mortgage rate a few weeks ago, could be out of luck.

“There’s no certainty if a new bank would honor your locked rate in the event of a liquidation,” he said. “If the bank had been sold and/or didn't survive, there's no telling what would have happened to those clients.”

According to Reynolds, if your situation is uncertain, the best move is to talk to your mortgage broker and contact your bank to get a better understanding of what steps to take in the event of a bank failure — before it’s out of your control.

That’s what Reynolds is doing again.

“The irony in all of this: Even though my client closed, the buyer of his home is also underwriting their loan through First Republic. So we have to ensure that the buyer of my client’s home will also be able to close,” he said.

It could be touch and go. On Wednesday, the bank's credit rating was cut to junk by two ratings agencies and its shares lost more than 21%.

“The closing is set for mid-April," Reynolds said, "so for any reason the bank has a failure, we will still have nearly 30 days to close with another bank.”

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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