Friday, January 31, 2014

Can Small Banks continue doing home loans?




Like most banking institutions in today's climate, small banks are not immune from regulatory concerns and issues. "We can work to recover bad loans, but we can do nothing to alleviate the cost of the increasing burden of compliance," said Fife Commercial Bank CFO Mark Southwick. Most community banks are happy to accept the tag as "customer oriented," however many found themselves expanding into first lien lending over the past five years to meet demand from their customer base. This expansion has recently become a cost-to-benefit concern as federal regulations require more time to insure compliance, especially challenging for banks with assets less than $100mm. The article continues with Hershey State Bank's CEO Kenneth Niedan, "...with slightly more than $65 million in assets and 17 employees, [the bank] got into mortgage lending four or five years ago because of demand in the market. The fee income from that business amounted to about 12% of the bank's gross this year. But the bank officer overseeing that lending line also had to take on the burden of auditing loans for compliance, which takes more than half of her time. She has concerns about whether she can keep up with all the regulations. The Dodd-Frank Act's rules on mortgage lending are "giving us the fits."

 

Shifting gears to the financial markets, the U.S. Treasury Department recently released the International Capital Data for November. The so-called "TIC" number is basically a breakdown of which country is purchasing our debt. According to Treasury, "The sum total in November of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC outflow of $16.6 billion. Of this, net foreign private outflows were $30.5 billion, and net foreign official inflows were $13.9 billion." Foreign residents decreased their holdings of long-term U.S. securities in November, while U.S. residents increased their holdings of long-term foreign securities. You may be asking yourself right now, "why is this number important to me, I'm just a mortgage broker/processor/underwriter/secondary trader or compliance officer?" Because it is very important to know how willing foreign investors are in purchasing U.S. debt. When TIC data is rising, this traditionally indicates the net purchases of long-term securities is increasing; you know that foreign investors are still interested in buying U.S. debt and that interest rates will most likely remain low. If, however, TIC data is decreasing, this traditionally indicates the net purchases of long-term securities is decreasing; you know that foreign investors are losing interest in buying U.S. debt and that interest rates will most likely need to rise in the future to entice more buyers.

 

But the Fed's activities are still very relevant. The latest report from the New York Federal Reserve Bank which reported net purchases averaged $2.52 billion per day ($12.6 billion total) for the week ending January 29, which compared to mortgage banker selling that averaged $1.1 billion. So yes, on a percentage basis the Fed is still buying more than originators are producing.

 

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