November 2014 - While the U.S. economy continues its modest recovery and housing markets in the southeast have largely stabilized, residential lending growth for many financial institutions remains elusive.
SNL recently reported that median loan growth in the second quarter among commercial banks with less than $10 billion in assets was only 2.28 percent, compared to 5.58 percent in the second quarter of 2013. Additionally, the Mortgage Bankers Association (MBA) is forecasting a 40 percent decline in mortgage originations in 2014 from 2013. While much of the decline can be attributed to a slowdown in refinancing, the MBA is forecasting a 10.6 percent decline in purchase originations for 2014.
Credit continues to be tight as the industry digests the implications of the Qualified Mortgage (QM) rule. In particular, the lack of a secondary market for non-Qualified Mortgages has led some institutions to pull back on lending to lower-income borrowers, the self-employed, seasonal earners, and others without W-2 income.
These data and conditions point to a challenging environment for residential lending for the remainder of 2014 and into the foreseeable future. Lenders seeking to grow their mortgage business and assets will be competing for shares of a smaller pie, and will need to think outside of the box to attract new borrowers. FHLBank Atlanta points to three strategies that may help shareholder institutions grow loans and assets despite these challenging conditions.
Custom Products for Niche Markets
Institutions that can offer customized mortgage products to small business owners and other niche markets that may not easily fall within conforming guidelines can set themselves apart from their competitors. Small business deposit and loan relationships are the bread and butter of many community banks, and offering residential mortgages to these business owners is a natural cross-selling opportunity. Other niche markets such as self-employed borrowers or those with seasonal income streams are well-suited to the relationship-oriented approach of community banks and credit unions. However, the aforementioned regulatory requirements have made lending to these customer markets more challenging. Institutions that wish to serve these markets must do so through portfolio lending.
Holding long-term loans brings inherent risks to an institution’s balance sheet, but with the right wholesale funding strategy, our shareholders can offer customized mortgage products at competitive prices while hedging the interest-rate risk.
FHLBank Atlanta’s Principal Reducing Credit (PRC) advance offers custom amortization schedules that enable an institution to mirror the stream of payments from a loan or pool of loans. This advance would be useful to match-fund any number of customized mortgage products, such as a “skip-a-payment” mortgage for seasonal earners.
Additionally, a simple strategy of blending retail deposits with a ladder of three-, five-, and seven-year Fixed Rate Credit advances can help shareholders manage the interest-rate risk associated withholding long-term, fixed-rate loans on the books.
Target Low- to Moderate-Income Markets
Stricter credit standards, including the ability-to-repay provision of the QM rule, have led some lenders to pull back from the lower end of the conforming market. However, there are opportunities – and creditworthy borrowers – in the low- to moderate-income market, which can be an excellent source of asset growth.
Often the most difficult barrier for a low- to moderate-income borrower to purchase a home is the initial cash outlay for the down payment and closing costs. FHLBank Atlanta has a number of affordable housing products that its shareholder institutions can use to help low- to moderate-income families purchase a home. These products offer grants of up to $15,000 to a qualified homebuyer for a down payment, closing costs, and principal reduction.
Lenders can use the Bank’s affordable housing programs to target a variety of markets, including first-time homebuyers, veterans and military households, as well as people employed as educators, law enforcement officers, firefighters, and health care workers. The products are an excellent way to attract new customers and drive mortgage originations. In 2013, FHLBank Atlanta shareholders originated more than $140 million in first mortgages in conjunction with the Bank’s homeownership grant products.
Purchased Mortgage-Backed Securities
Purchasing mortgage-backed securities (MBS) is another strategy being employed by financial institutions looking to supplement organic loan growth with assets that generate interest income. FHLBank Atlanta offers advances that can help fund this asset growth. Two options that may deliver an added boost to net interest margin are the Bank’s Community Investment Program and Economic Development Program, which offer up to 10 basis points off of standard advance pricing. These two advance programs can be used to fund loans and purchased MBS that support housing for low- to moderate-income households or economic development projects that benefit low- to moderate-income neighborhoods. The advances are available with a variety of terms and structures and have minimal reporting requirements.
FHLBank Atlanta has resources and in-house experts that can help your institution create an effective mortgage strategy and funding approach to grow assets while managing risk. For more information, call your relationship manager or the Funding Desk at 1.800.536.9650.
The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial, and accounting advisors before entering into any transaction.