Magazine article American Banker

Community Banks Grapple with Mortgage Disconnect

Magazine article American Banker

Community Banks Grapple with Mortgage Disconnect

Article excerpt

Byline: John Engen

By Richard DeKaser's calculations, it takes just 16.5% of the average consumer's income to make payments on a 30-year mortgage for an average-priced home. The last time the ratio was this low was 1968.

"This is the most affordable market most Americans have ever lived in," says DeKaser, an economist at Parthenon Group, a Boston management consulting firm.

Buyers remain on the sidelines, contributing to a sense of dread about a housing bust that seems set to get worse before it gets better. Every bank in the country is affected, and the response generally can be categorized according to size - but not necessarily along expected lines.

The severity this time around suggests something more than cyclical downsizing. Fundamental changes are afoot in the housing market and big banks are not the only institutions to notice.

Emboldened by a sharp drop in the number of independent mortgage banks and brokers, community banks viewing the disarray as an invitation to the market. Many that focused on commercial loans are looking at mortgages as a place to put deposits to work.

Joe Garrett, a consultant in San Francisco, says he has helped banks that were strictly commercial and construction lenders buy or build mortgage operations. "It's almost impossible to find good C&I loans, commercial real estate is dead and the board would kill me if I did any construction lending," he says.

"Suddenly, mortgage banking looks very attractive to them. You get the gains from selling the loan, and holding a loan with a 4.5% rate on your books - even for a few weeks - looks pretty good compared to Fed funds."

The industry is disappointed by the number of mortgage originations. Mortgage lending surged briefly in late 2010, as low rates generated a flood of refinancing. With little help from homebuyers, volume plunged 35% in the first quarter.

"Mortgages are a bread-and-butter business for us," says Jack Hartings, CEO of the $350 million-asset Peoples Bank in Coldwater, Ohio, which has lately been originating about 15 mortgages a month. "We're real estate lenders, but right now we're running at about half the volume we saw in 2009 and 2010, due to the economy."

If there is an upside to the dearth of mortgages, it might be that the timing coincides with a moribund securitization market.

While Fannie Mae, Freddie Mac and the Federal Housing Administration continue to issue securities for conventional loans, investors seem too skittish to put their money into private-label offerings without a government guarantee.

Lawmakers seem intent on doing away with Fannie and Freddie, which together own 31 million conventional home loans totaling about $5 trillion. Without the government-sponsored enterprises, something else would be needed to facilitate the securitization of mortgage loans.

The Obama administration has proposed several options for replacing Fannie and Freddie. One would limit government backing for mortgages to a handful of groups, including veterans and low-income families. Another would add an emergency government backstop provision for all loans in times of crisis.

A third option would maintain uniform underwriting standards, but back mortgages with private capital, replacing Fannie and Freddie's implicit government guarantee. The government would act as a reinsurer in cases of catastrophic risk, much like the FDIC backs up deposits.

The question is, who would own and manage the new system? A logical answer might be the big servicers, which already work with most borrowers. But community banks don't like the idea.

"Our members don't want to have to sell the servicing, and then worry about their customers being cross-sold products by bigger competitors," says Ron Haynie, the CEO of ICBA Mortgage, a unit of the Independent Community Bankers of America. The ICBA has proposed that an independent cooperative securitize loans instead. …

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