Who needs to worry about MBS risk-retention rules when you can hold fixed-rate mortgages in portfolio?
Just talk to San Francisco-based Union Bank NA, which not only holds jumbo loans in portfolio, but a product called the Economic Opportunity Mortgage, which are made to low- and moderate-income residents in California.
In 2010 it originated $131 million of EOM loans, and hopes to double that amount this year. Presently, it holds roughly $650 million of EOM notes in portfolio—that is, on its books.
Union is well known in the mortgage industry for originating jumbos—using both retail loan officers and loan brokers—while keeping the paper in portfolio. (There are plenty of conduits out there that would love to buy Union’s jumbo production, but the company isn’t selling.)
But the EOM loans that the Japanese-owned bank makes are much smaller in size—in the range of $200,000 to $300,000, said executive vice president James H. Francis.
The mortgages would be eligible for sale to Fannie Mae and Freddie Mac, except for one major catch. “There’s no mortgage insurance on them,” Francis said.
Recently, the bank loosened its underwriting guidelines, agreeing to fund EOM loans with loan-to-value ratios of up to 95%. On the surface, this might look risky, but Francis says the delinquencies on the product have been relatively low at less than 2.5%.
“We’ve been making many of these loans in the Los Angeles and San Francisco areas where we have branches—in minority communities,” he said. “We aggressively underwrite them. We verify the income and so far we’ve had very few foreclosures.”
Although most of the EOM production has been in California, the bank plans to introduce the product to other states where it has branches, in particular Oregon and Washington, a market it entered last year when it bought the failed Frontier Bank, Everett, Wash., from the Federal Deposit Insurance Corp.
“Anywhere we have deposits, we’ll make the loan,” said Francis, who is quick to admit that the product also helps the bank meet its CRA requirements. “Yes, these are good CRA credits,” he said.
Of course, anyone with a history of mortgage banking might recall that in decades past, the savings and loan industry ran into problems by “borrowing short and lending long,” that is, making 30-year fixed-rate loans and funding them with short-term deposits.
Union Bank declined to answer questions about whether it “match-funds” EOM loans, but with profit margins on residential loans being so favorable the past few years, it probably doesn’t have much to worry about, at least for now.
The bank’s foray into portfolio lending might serve as a model to other institutions, but as historians of the industry might attest, mortgage banking can also be a highly fickle (cyclical) business. Just because the spreads on residential finance are favorable now, that won’t always be the case.
