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Federal Reserve financial stability experts are on the lookout for weaknesses after a year of rising interest rates — and as they survey the potential risks confronting the system, they are increasingly watching office loans and other commercial real estate borrowing, the New York Times reported. Fed officials have lifted borrowing costs rapidly over the past year — to just above 5 percent from near-zero in early 2022 — to cool rapid inflation by slowing the economy. So far, the fallout from that abrupt change has been most obvious in the banking sector. A series of high-profile banks have collapsed or faced turmoil in recent weeks partly because they were poorly prepared for heftier borrowing costs. But Fed staff members and market experts whom they surveyed cited commercial real estate as another area worth watching in the central bank’s twice-annual Financial Stability Report, which was released Monday. The jump in interest rates over the past year “increases the risk” that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term, Fed staff wrote in the report, noting that commercial real estate values remain “elevated.” “The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of C.R.E. debt,” the report said — noting that many of those holders are banks, particularly smaller banks. The Fed’s comments on commercial real estate amounted to muted watchfulness rather than a full-throated warning — but they come at a time when many investors and economists are closely monitoring the sector. The outlook for office buildings in downtown areas, where workers have not fully returned after a shift to remote work that began during the coronavirus pandemic, has emerged as a particular concern on Wall Street.

The seeds of First Republic Bank’s downfall were sown in the jumbo mortgages of Silicon Valley, where a unique strategy to loan wealthy individuals extraordinary sums of money blew up in spectacular fashion, Bloomberg News reported. In the early 1980s, First Republic Chairman Jim Herbert, then running San Francisco Bancorp, wanted to get into a new line of business. The Bay Area’s high earners were coming to him and asking for unusually large loans to buy pricey properties in the area. “Why don’t we do a couple of these and see how they go? Can’t bankrupt the whole bank,” Herbert said to the firm’s president, according to an account of the conversation on First Republic’s website. Years later, after Herbert left San Francisco Bancorp and founded First Republic, his new bank became known for handing out interest-only mortgages at rock-bottom rates to borrowers with high incomes and exceptional credit scores. Typically, they didn’t have to start repaying the principal for a decade. Demand for the loans surged during the pandemic as wealthy buyers sought mortgage deals that would allow them to keep the bulk of their money in higher return investments. The rush helped First Republic double its assets in four years. It also contributed to its collapse. In the early hours of Monday morning, JPMorgan Chase & Co. agreed to acquire First Republic from the Federal Deposit Insurance Corp., which seized the bank after a tumultuous period in which its stock had cratered and depositors had pulled almost half their money. Just a few weeks earlier, Wall Street’s biggest banks had stepped in to shore it up with their own cash.

Bankruptcy Judge Mary F. Walrath on Friday approved a multibillion-dollar business wind-down for Reverse Mortgage Investment Trust (RMIT), one day after a delay allowed the company to provide additional information on funding for its liquidation, National Mortgage Professional reported. On Thursday, Judge Walrath halted RMIT's scheduled confirmation hearing after raising concerns about the feasibility of the company's plans to meet top-priority case administration claims without further reorganization. By Friday morning, however, RMIT had filed a revised order, plan and declaration that addressed the judge's concerns. The plan includes proposals for financing a case with $1.23 billion in long-term funded debt and a mortgage-servicing portfolio that totaled over $25.5 billion when the company filed its chapter 11 petition. The revised declaration includes a more comprehensive description of the expected estate funding that would be available throughout the wind-down and explains how administrative claims are to be paid, according to Patrick Venter of Sidley Austin LLP, an attorney representing RMIT. RMIT filed for bankruptcy at the end of November, citing rising interest rates and a downturn in new loans for its liquidity crisis. RMIT is one of the largest originators of reverse mortgages in the U.S., with the majority of its reverse mortgage portfolio insured by the Federal Housing Administration (FHA) and pooled into mortgage-backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae).

To resolve a split of circuits, the Supreme Court heard oral argument in Tyler v. Hennepin County to decide whether a real estate tax foreclosure violates the Takings Clause of the Fifth Amendment when a municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property. Oral argument on April 26 was the last argument of the term that began in October. Given the significance of the case in terms of constitutional law, the Court allowed almost two hours for argument. The Court will hand down a decision before the term ends in late June. The decision in Tyler may (or may not) resolve a long-standing circuit split on the question of whether a tax foreclosure can be attacked in bankruptcy as a fraudulent transfer.​​​​

A government-backed reverse-mortgage program intended to help seniors tap their home equity ran into problems as interest rates rose, pushing one of the largest participating lenders into bankruptcy last fall, recent court documents show, WSJ Pro Bankruptcy reported. Reverse Mortgage Investment Trust Inc. filed for chapter 11 in November as it faced a liquidity crunch, and the 116,000 loans on its books are now being managed by the U.S. government. RMIT’s bankruptcy filings reveal how the government-backed loan program worked against the company’s survival. The program’s rules required RMIT to take out a rising number of market-rate loans to buy out existing loans that carried lower rates, something that became unsustainable as interest rates kept rising and funding dried up, the lender said. The Department of Housing and Urban Development is “exploring ways to offer support to address current liquidity challenges” facing lenders by making changes to the program, a HUD representative said. What happened to RMIT illustrates the challenges facing reverse-mortgage lenders, said Jim Parrott, a nonresident fellow at the Urban Institute, a Washington think tank. A recent report co-written by Mr. Parrott said policy makers “need to work quickly, because if this burden is not addressed soon, the liquidity challenges that brought down [RMIT] will drive off the rest of the industry.”

Mortgage rates are falling steadily after months of varied increases and short reprieves. But rates remain drastically higher than a year earlier, and buyers, especially those looking to buy their first home, could face lingering challenges, The Hill reported. The benchmark 30-year fixed mortgage rate cooled for the fourth straight week in the first week of March, sliding to 6.32 percent according to Freddie Mac. “Unfortunately, those in the market to buy are facing a number of challenges, not the least of which is the low inventory of homes for sale, especially for aspiring first-time homebuyers,” the agency said. Separate data from the Mortgage Bankers Association (MBA) also shows that despite falling rates, demand for new mortgages is weakening, especially on the entry level side of the market.