This Month in Retail Banking
The choice financial institutions face between retaining mortgage loans in portfolio or selling them into the secondary market has taken an interesting turn in 2023 due to scarcer deposits as a funding source and the prospect of new capital requirements. Over the past year, the rates banks and credit unions offer for portfolio loans have increased by ~50 basis points relative to loans sold into the secondary market.
As a result, Curinos sees portfolio lenders engaging in niche lending by targeting borrowers at opposite ends of the spectrum: low-to-moderate income on one side of the barbell and high wealth on the other (Figure 1). As one lender put it recently, this strategy is in “overdrive.”
Figure 1: Niche Loan Programs
In the low-income space, we’re seeing unprecedented pressure to make loans, including those originated for sale to the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. These include below-market rates, loans made without mortgage insurance and loans offering down payment assistance.
Curinos data suggest that much of this activity can be attributed to first-time homebuyers. Financial institutions are leaning into low down-payment GSE products, FHA loans and/or proprietary portfolio mortgage products geared toward affordable lending.
The wealth segment includes borrowers who have assets on account with the bank and borrowers who represent potential value, often a prerequisite for the best rates, and many banks are developing price incentives to attract them. Not among them are the “Lonelys,” a term we’ve heard recently for borrowers who don’t represent additional relationship value.
Also growing significantly are “doctor’s loans” – shorthand for lending to professionals with strong income and good credit but lacking a down payment because of years of education costs. These borrowers come with the added potential of bringing deposits and business banking to the relationship.
For depository institutions, the spread between GSE-qualifying loans and bank portfolio loans has narrowed from 100 bp to 40 bp over the past year (Figure 2). According to Curinos tracking, this dynamic also applies to both 30-year fixed jumbo rates, and 7- and 10-year ARM rates, which are still lower than those of GSE loans but much less so than before.
Figure 2: Portfolio Rates: Non-Conforming Vs. Conforming
Because banks assume credit risk on loans retained in portfolio, it’s important to know if they’re tightening credit to limit lending. Curinos is seeing little, if any, tightening on loans destined for the balance sheet. The credit levers we track through our data, including loan-to-value ratios, credit scores and debt-to-income ratios, haven’t shifted in a material way.