Ways to thrive during a mortgage lending dip

Increased lender competition and tepid demand are putting pressure on the mortgage lending business among community banks.

By Beth Mattson-Teig

According to the Q3 2017 Fannie Mae Mortgage Lender Sentiment Survey, net profit margins have been on a downward trajectory for the past four quarters. Although 54 percent of survey respondents said their profit margin outlook for the next three months remains the same, 29 percent anticipate a decrease compared to 17 percent who expect an increase.

The top two reasons cited for declining profit margins are increased competition at 74 percent and constrained consumer demand at 35 percent. The big issue affecting many community banks is a shortage of homes for sale. “We have quite a few markets where there just aren’t a lot of houses available for people who want to be buying,” says Paul Peterson, a senior vice president of corporate residential real estate at Glacier Bancorp Inc., a $10 billion banking company in Kalispell, Mont.

The month’s supply—stated as the number of months it would take for all current homes on the market to be sold—has been hovering at about four months this year. This is well below the six-month level that represents a balanced market, according to the National Association of Realtors (NAR). Home sales for September were at 5.39 million, which is relatively flat year-over-year and a 0.7 percent increase compared to August, according to NAR.

Some markets have a 30-day supply of existing housing inventory or less, adds Peterson.

The more challenging market for homebuyers is taking a toll on mortgage originations. Glacier expects to do about $1.2 billion in mortgage originations this year, which is down slightly compared with the nearly $1.4 billion the company originated in 2016.

“The consensus is that the market is soft right now for new originations,” agrees Joe Nelson, senior vice president and mortgage division manager at Chain Bridge Bank, N.A., a $500 million-asset bank based in McLean, Va. The amount of inbound activity Chain Bridge is seeing in terms of phone calls and inquiries has slowed. In fact, the community bank’s third-quarter origination volume is the lowest it has experienced in three years, Nelson says.

Easing credit standards?
The Fannie Mae survey also reported a continued uptick in reports of easing credit standards across all loan types as lenders work harder to win business. During Q3 2017, 26 percent of lenders reported that they had eased standards on GSE-eligible loans, 22 percent on non-GSE eligible and 15 percent on government mortgages.

“We are certainly not easing our credit standards. We do see super-aggressive pricing, and I would anticipate that will create some pressure on margins.”
—Paul Peterson, Glacier Bancorp

Not everyone agrees. “I don’t think we are seeing a big shift in easing of credit standards,” says Peterson. “We are certainly not easing our credit standards. We do see super-aggressive pricing, and I would anticipate that will create some pressure on margins.” While Glacier has not yet dropped its pricing, Peterson says it may be “forced” to do so at some point if the more competitive rates start to have an impact on business.

Certainly, there are always lenders that relax underwriting or become more aggressive when the market slows in order to maintain loan production volume, notes Nelson. “We don’t compromise on our margins or on underwriting standards, whether it is good times or bad,” he says.


Among survey respondents reporting declining profit margins, almost three-quarters cited increased competition as a cause.

One advantage for community banks is that they are driven more by the balance sheet, whereas mortgage companies are driven solely by fees.
“So we are not prone to the stress of a decline like a mortgage origination shop,” says Nelson. “Our bank has $125 million in residential loans on our books that are producing interest every single day. So it is a different formula.”

Customers first
Community banks are relying on their existing customer base and relationships with local brokers and developers to sustain their mortgage business. “We have some very loyal customers, and I do think we get first swing at a lot of transactions,” says Nelson.

Chain Bridge Bank has been originating mortgages since the bank first opened in 2007 and established a mortgage division in 2012. The bank currently produces about $70 million in residential mortgages annually, including both new purchases and refinancing activity. Chain Bridge attempts to maintain full banking relationships with all of its clients.

Another strategy for banks amid flat or lower origination activity is to focus on managing costs as a means to improve profit margins. For example, Glacier is continuing to grow by acquiring smaller banks and is able to leverage existing back-office support systems across that growing footprint. “We are always looking at ways to continuously improve our process,” says Peterson, “and I think we have some opportunities for process optimization and ways that we can be more efficient and effective so that we can manage our costs and our capacity.”

Beth Mattson-Teig is a business writer in Minnesota.