Some large banks sold fewer mortgages to Fannie Mae and Freddie Mac during the third quarter, using them to manage interest rate risk and to slow the contraction of loans.
M&T Bank Corp., SunTrust Banks Inc. and Fifth Third Bancorp said they saw new value in keeping quality home loans on the books given the anemic lending environment and falling rates on securities, especially Treasuries and bonds issued by Fannie Mae and Freddie Mac.
Retained mortgages helped them maintain the balance of rates and maturity dates in their deposit and lending books, perhaps the most important harmony in banking.
"Everyone is dealing with declining loan portfolios… This helps them stave that off," said Scott Siefers, a managing director with Sandler O'Neill & Partners LP who covers Fifth Third. "It helps to preserve some revenue. They must have just decided from a risk-reward standpoint it makes sense to hold on to these."
On several occasions National Mortgage News has reported that many depositories – both large and small – are keeping their jumbo loans in portfolio because the spread they can earn on these assets is extremely attractive.
Mortgage standards have tightened dramatically since the economy collapsed, so there is little risk of new mortgages going bad. These three banks are also healthy enough to do without the revenue bump that comes from selling a home loan to Fannie and Freddie. They can afford to hold on to performing mortgages that will deliver hard-to-find interest income in a weak lending environment, experts said.
"My suspicion is that they feel from a yield perspective they can do better and still have the optionality to sell or securitize it down the road," said Kevin Fitzsimmons, another managing director with Sandler O'Neill.
M&T and Fifth Third have lost their appetite for government-backed bonds, which have been increasingly popular with other large banks eager to invest deposits. Rates on such bonds — already less favorable than on loans — have been falling. These companies are worried about owning too many in case rates increase.
With businesses and consumers still reluctant to borrow, mortgages are the only game in town for any bank interested in putting substantial loan-related earning assets on the books.
