Bankers Lose Appetite for Holding 15-Year Mortgages

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Byline: Rachel Witkowski

When it comes to dealing in mortgages, bankers must know when to hold them and went to unload them, and a growing number of banks are opting for the latter option.

More banks are opting to sell their 10- and 15-year mortgages rather than keeping them in their loan portfolio. Bankers, wary of exposure to assets with long terms and fixed rates, had already shown an aversion to 30-year mortgages. For most bankers, declining yields on mortgage loans are not worth the longer-term risk of rising interest rates.

"It's incredibly dangerous" to book longer-term fixed-rate mortgages, says Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners. Doing so "wreaks havoc" a bank's rate sensitivity and "it scares the daylights out of the regulators."

BB&T has been selling 10- and 15-year mortgages in the secondary market since the second quarter, and other banks have followed its lead. More community banks decided in the third quarter to start shedding such loans, which they have historically held on their balance sheets.

"We're not even adding any more 15-year mortgages," says Gerard Host, the president and chief executive at Trustmark in Jackson, Miss. The $10 billion-asset company is retaining 10-year fixed-rate and adjustable-rate mortgages. But Trustmark views the 15-year mortgage as "a longer term loan and, at a relatively low rate, it creates interest rate risk," he says.

The average yield on a 15-year mortgage has fallen 58 basis points this year, reaching 2.66% last week, according to Freddie Mac. Bankers usually need at least a 3% spread between deposit and loan rates to make money.

"We're trying to manage our spread income without taking too much interest rate risk," says Philip Wenger, incoming chairman, president and chief executive at Fulton Financial in Lancaster, Pa. In August, the $16.3 billion-asset company began limiting the amount of 15-year mortgages it would originate and keep in its portfolio in any given month.

Still, many banks are underwriting more mortgages than they have in recent years, because people are refinancing to take advantage of low rates. Wenger says Fulton began holding 10- and 15-year mortgages last year. …