First Republic handed out billions in ultra-low-rate mortgages to the wealthy. It backfired horribly.
One of the causes of First Republic's troubles is a strategy to woo rich clients with huge mortgages that offer sweet terms, as detailed inIn particular, First Republic would offer interest-only mortgages, where the borrower didn't have to pay back any principal for the first decade of the loan. In 2020 and 2021, it extended close to $20 billion of these loans in San Francisco, Los Angeles, and New York alone, per Bloomberg's analysis.
Many of these loans went to ultra wealthy types in finance, tech, and media. For example, one of the most senior executives at Goldman Sachs took out an $11.2 million mortgage with First Republic with no principal payments in the first 10 years and an interest rate below 3%, per Bloomberg.
And these loans are hard to sell to other lenders, given Fannie Mae and Freddie Mac are limited to onlyup to just over $1 million. Should they successfully sell, it would also create a hole in First Republic's balance sheet. The bank would be forced to recognize the current value of these loans, and what are currently unrealized losses could suddenly wipe out the bank's capital.
First Republic is now backtracking from this strategy, saying it will focus on writing loans that are guaranteed by Fannie and Freddie. More immediately, the bank is trying to find a way to convince buyers to take on some of its assets, including finding ways to sweeten the deal with equity-like instruments so buyers pay a higher price for the loans, according to Tan and Monks at Bloomberg.Sign up for notifications from Insider! Stay up to date with what you want to know.
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