The collapse of First Republic was fueled by “jumbo mortgages” for high net worth clients

The collapse of First Republic Bank was caused in part by the offering of attractive “jumbo” mortgages to wealthy customers whose loans were interest-only for up to ten years.

The bankrupt bank sold floor-rate loans to wealthy clients, including Goldman Sachs president John Waldron and music magnate Todd Moscowitz, the former CEO of Warner Bros Records, who both bought multi-million dollar homes in New York City, property records show.

A staple of First Republic’s business model for decades, these “jumbo mortgages” were common for buyers, but became a huge burden to the bank when the Federal Reserve began aggressively raising interest rates in 2022.

First Republic essentially suffered massive losses as it recovered meager interest from mortgages worth about $137 billion while the value of the debt plummeted.

The same market forces contributed to the collapse of Silicon Valley Bank, whose bet on low-yield, long-term bonds failed as the Fed hiked rates and the value of their investments plummeted.

New York City real estate data reveals wealthy figures who recently benefited from First Republic’s interest-only mortgages, including Todd Moscowitz, former CEO of Warner Bros Records

John E Waldron, president and chief operating officer of Goldman Sachs, took out an $11.2 million mortgage with First Republic for an apartment in New York City. The loans were great for customers, but turned into a nightmare for the bank, which lost billions on the low-interest deals

Property records in New York City show that Goldman Sachs president John Waldron took out an $11.2 million mortgage from First Republic on an apartment in the luxury 15 Central Park West building.

Waldron bought the unit in June 2020, when the Fed’s interest rate was just 0.08%. The rate of Waldron’s mortgage is unclear, but it reportedly had a ten-year grace period.

In June 2022, Music Director Todd Moscowitz purchased a penthouse in Manhattan’s trendy Tribeca neighborhood with a First Republic mortgage of approximately $8 million. His loan also had a ten-year interest period.

a Bloomberg Analysis revealed that these mortgages were also picked up by other finance bosses, tech executives, and a gallery owner to purchase real estate in New York City.

First Republic handed out $20 billion in interest-only mortgages in San Francisco, New York and LA in 2020 and 2021 alone, the analysis found. Clients were actually on the cusp of making money as the value of their properties increased by more than their payments.

The bank was happy to make the loans because the borrowers were wealthy and had good credit scores. It was the low interest rates that became a problem.

Loan values ​​fell as Federal Reserve interest rates rose, and by early 2023, First Republic estimated mortgage collections were worth $19 billion less than their original value.

In June 2022, Music Director Todd Moscowitz acquired a penthouse in Manhattan’s trendy Tribeca neighborhood with a First Republic mortgage of approximately $8 million

New York City property records show Goldman Sachs president John Waldron took out an $11.2 million mortgage from First Republic on a condo unit in the 15 Central Park West building

Regulators announced Monday morning that they had seized First Republic and that the bank would be acquired by JPMorgan.

The collapse came after months of unrest in the wake of the collapse of the SVB. Last week, First Republic’s share price was decimated after it was revealed that it had lost $100 billion in deposits in the first quarter of 2023.

First Republic’s collapse also came despite a $30 billion injection of funding from 11 larger banks in March to try to stabilize the sector.

The bank’s stock closed Friday at $3.51, a fraction of the roughly $170 per share it traded for a year ago. It fell further in after-hours trading.

First Republic will still be open as usual on May 1, with customers continuing to receive uninterrupted service, but it will be rebranded as JPMorgan.

JPMorgan has taken on approximately $173 billion in loans and $30 billion in securities, as well as $92 billion in deposits, including $30 billion in major bank deposits.

First Republic Bank was sold to JPMorgan Chase after regulators seized it Monday. Pictured: The headquarters of the First Republic Bank is seen on March 16, 2023 in San Francisco

The bank’s stock closed Friday at $3.51, a fraction of the roughly $150 per share it traded for just three months ago a year ago. It fell further in after-hours trading

Jamie Dimon, chief executive officer of JPMorgan Chase & Co, who said of the purchase of First Republic: ‘Our government invited us and others to act, and we did’

President Joe Biden said Monday that “taxpayers are not on the hook” after the collapse of the First Republic.

“These actions will ensure that the banking system is safe and sound,” Biden said of the JPMorgan bailout.

First Republic’s 84 branches opened Monday as JPMorgan Chase branches.

Before this year, First Republic was the envy of the banking industry. The well-appointed branches served hot cookies to customers, who were almost exclusively wealthy and powerful.

The bankers lured wealthy customers with cheap mortgages and attractive savings rates to sell them to higher-profit businesses such as asset management and brokerage accounts.

In return, the wealthy rarely defaulted on their loans and parked substantial sums of money in the bank that could be lent elsewhere.

But that business model of catering to the wealthy became a problem with the collapse of Silicon Valley Bank and Signature Bank.

These banks had a large number of uninsured deposits – that is, deposits above the $250,000 limit set by the FDIC. As was the case with Silicon Valley Bank and Signature Bank, First Republic clients with large accounts quickly withdrew their money at the first sign of trouble.