Magazine article American Banker

Act in Long-Term Interest When Rates Start Rising

Magazine article American Banker

Act in Long-Term Interest When Rates Start Rising

Article excerpt

At BNK Advisory Group Inc.'s recent annual conference, whose theme was Avoiding the Python Pit, the keynote speaker, Prof. Edmond Seifried of Lafayette College, warned that interest rates could climb soon.

Bankers therefore should concentrate on making adjustable-rate mortgages, he said, instead of fixed-rate liens that could lock them in with yields that may become well below their cost of money.

That is all well and good, but it's like urging mice to bell the cat. When the bankers who agreed were asked, "How do you get the mortgage borrowers to accept ARMs when they can get low, fixed-rate loans today and lock in their costs for years?" there was silence.

Only one suggestion was made, and that was by a banker who offers a very low fixed rate for several years followed by a step-up to whatever rate is in effect after that time.

And when this banker was asked, "How can you keep these borrowers from refinancing after their teaser-rate period is over?" he too had no answers.

Of course, the way most community bankers handle the problem of being locked in with low-yield, fixed-rate loans is to sell them immediately on the secondary market.

That solves the future problem of funding them with high-cost savings and certificates of deposit, but it keeps the bank from growing and serving its homebuying base. The bank becomes largely a pass-through between the local community and Wall Street, where the mortgages end up being sold.

This has been an acceptable solution while interest rates have been low, mortgage refinancing has been active, and banks have generated good profits from refinancing fees. But a bank cannot live just on noninterest income, especially when rising interest rates slow the refinancing business.

What are the alternatives?

One was offered by another speaker, Jack R. Salvetti, the managing director of the financial institution services group at the S. …

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