PERSON OF THE WEEK: As the mortgage banking industry continues to be reshaped in a tumultuous manner, community banks are finding themselves in a new and often challenging environment. To understand how community banks are reacting, MortgageOrb spoke with Scott Hall, president of Community Mortgage Solutions at Denver-based LenderLive
Q: What impact will the proposed qualified mortgage (QM) rule have on the ability of community banks to originate mortgages?
Hall: The QM proposal will have significant adverse impact on community banks if the Consumer Financial Protection Bureau (CFPB) does not provide community banks with a safe harbor from the ability to repay requirements mandated by the Dodd-Frank Act. There is concern among community bankers that traditional balloon mortgage loans held in portfolio – which, in many cases, may be the only mortgage option for many community bank customers – will not be viewed as a qualified mortgage resulting in the inability to continue to offer this popular product.
Community banks are urging regulatory agencies to not define qualified residential mortgage under the credit risk retention rules of Dodd-Frank so stringently that community banks would no longer have the ability to structure loan terms that fit a qualified borrower's unique financial situation. Too narrow a definition will severely limit credit availability to many creditworthy borrowers who do not have significant down payments or have seasonal incomes, or other unique situations that fall outside of secondary market guidelines. Community banks need to retain the flexibility to serve these borrowers.
Q: How do community banks, as a whole, view the strategy of retained servicing?
Hall: Most community banks will retain some mortgage servicing – however, typically, not on long-term, fixed-rate products. While longer amortization periods, such as 15 or 30 years may be available, these notes typically come with a demand or balloon feature.
More and more, community banks are looking for friendly servicing options on traditional secondary market eligible loans in order to offer long-term, fixed-rate loans at today's historically low rates. These friendly options preserve the customer relationship by avoiding the cross-selling tactics of the large mortgage servicers.
Q: What are the major servicing issues that impact today's community banks?
Hall: The cost of servicing portfolio loans, particularly under-performing loans, is a major concern. Regarding secondary market loans, the predatory cross-selling tactics of the large mortgage servicers represent the most significant concern.
Q: Do you see more community banks keeping residential mortgages in their portfolios, or are they becoming more active in secondary marketing?
Hall: Historically low rate long-term, fixed-rate loans, concern about how the CFPB will interpret QM legislation and the need to find new sources of non-interest income have most community banks seriously considering their secondary market lending options. What many are finding, however, is that increased regulatory burdens and increased expenses associated with this type of lending make this option more challenging than ever before.
Average origination costs (marketing through servicing) now exceed $2,400 on each mortgage loan originated by community banks and thrifts. Rapidly changing compliance requirements carry stiff penalties if even an honest mistake is made. And if that were not enough, the likely potential that a secondary market investor/servicer will cross-sell a community bank's customer competing products is enough to keep many community banks out of secondary market lending.
Successful community banks are beginning to view the mortgage loan as a core banking product and with this the need to be competitive not only on service but on pricing options, too. As such, finding a good partner to assist in the delivery of these competitive mortgage loans is critical – a partner that provides not only a scalability solution, but protects the bank-customer relationship is highly desirable. For those community banks that find such a partner, secondary market lending can be very profitable.
Q: The credit union industry is slowly expanding its market share in mortgage origination. What impact will this have on community banks?
Hall: Most consumers are gravitating toward one end of the origination spectrum or the other – high-touch, customer-focused community banks and credit unions or the transactional-driven large money center banks. As a result, credit unions and community banks stand to benefit perhaps more than anyone by offering competitive secondary market eligible mortgage loans.
The same considerations expressed above apply for credit unions. Finding a good partner may be the difference between a success and failure. The obvious impact on community banks of this development is competition for the high-service level-minded consumer.
That said, there is significant business available to both credit unions and community banks if they improve marketing efforts to their respective members/depositors. While most credit union common bond requirements have been significantly reduced in recent years, any common bond requirement of a credit union member may give the community bank an upper hand when seeking non-bank customers through referral sources, such as Realtors, builders and CPAs.