Changing Times Demand Multiple Strategies
By: Bill Dolan, CMB, AMP
A recent conversation with a client of SCA posed the following question: Is now a good time to purchase a pool of residential loans? The dilemma that this institution realized is the same problem that many community banks and credit unions are facing today. You are originating and closing mortgages but the prepayment speeds you face (the rate in which borrowers pay their loans off depriving the lender from future mortgage payments) associated with your own mortgage portfolios cannot withstand the runoff you are experiencing.
Though we saw some volatility in the marketplace last week, it appears that interest rates continue to remain extremely low and now is an excellent time to contemplate purchasing a bulk or flow deal of loans for your balance sheet. However, have you asked yourself the following questions prior to delving into a transaction like this?
Will this transaction complement the strategy of your ALCO Committee?
Has this proposed transaction been vetted by your Board?
Has your institution bought/sold loans in either a bulk or flow deal previously?
Is your institution approved to service loans on behalf of the Agencies (Fannie Mae, Freddie Mac, FHLB etc.)?
Do you know the characteristics of the loans you wish to purchase?
Do you currently have mortgage servicing rights (MSRs) existing on your balance sheet today?
Do your currently amortize your MSRs as well as your mortgage servicing premiums today?
How do you value your MSRs?
Who will perform the due diligence on the pool of loans being purchased? Do you have the bandwidth and staff qualified to perform this function?
What yield are you pursuing on this pool of purchased loans?
Who is authorized within your institution to submit a formal bid for a bulk or flow sale?
Given the challenges impacting all facets of our industry today, the institutions that continue to push for incremental strategic improvement will be the ones in the driver seat going forward. Therefore, consider these and other questions you may wish to address at your next ALCO meeting because your number one priority at ALCO should be improving your balance sheet through ardent strategic implementation.
Let our advisory group at the SCA Mortgage Exchange help you improve your overall performance through proactive management of liquidity and interest rate risk by supporting the necessary strategies that will best fit the risk and return dynamics associated with your balance sheet.
For a free consultation, please feel free to reach out and contact Bill Dolan, Director at (617) 694-2617 or review our other services that SCA provides by visiting our website at: www.scpartnering.com
