Expand Your Lending

By Nelson, Karl R. | Independent Banker, April 1998 | Go to article overview

Expand Your Lending


Nelson, Karl R., Independent Banker


Consider two options to generate longer term, fixed-rate borrowing

Community bankers enjoyed record earnings during the six past consecutive years and are looking forward to an equally impressive performance in 1998. However, uncovering quality loan opportunities is becoming more difficult. As loan securitization grows, creating and holding onto good performing loans becomes increasingly challenging.

In this context, two loan opportunities may be relevant to your marketplace: residential mortgages and commercial "mini-perms." Too often these days, community bankers either create and sell residential mortgages or pass those excellent customer opportunities to mortgage bankers. A better strategy is to customize certain mortgage products, fund those loans with appropriate longer term liabilities, and hold those mortgages in your loan portfolio to boost your bank's profitability.

One new idea is a "baby boomer" mortgage-a product particularly attractive to people in the 45 to 50 age group. The idea is to identify existing customers who fit that age profile, then further filter those prospects based on income levels. Higher-income customers are the best target for this product.

Next, create a promotion exclusively for this audience based on the savings inherent in a 30-year versus a 15-year mortgage. This strategy could be as simple as a statement stuffer follow up with a direct mail campaign.

The next step is crucial in deciding whether your bank should sell or hold onto the mortgage. If you can customize your loan to avoid the securitization arena-for example, a mortgage exceeding the $227,150 secondary market cap-you may obtain a rate of interest that allows you to hold the loan in your portfolio. If you keep mortgages that fit this criterion, you might increase your bank's asset base and improve earnings.

The second and generally more lucrative loan opportunity is the commercial mini-perm, a mortgage on an owner-occupied property from which a business is conducted. This product allows you to analyze credit risk based on the business' cash flow repayment capability. As additional credit support, a first mortgage is also part of the mini-perm loan package. This loan used to be reserved for longer term lenders, such as insurance companies, but it found its way into bank portfolios in the 1980s.

As a prime-based product, the banking industry avoided interest rate risk, but placed the borrowers in the position of assuming risks associated with rising rate scenarios. In the 1990s, banks began to share some of this risk by offering three-year fixed rates with rate reset based on the prime index.

As we became comfortable with this structure, a third pricing option, five-year fixed rates, were offered. …

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