GIVE CREDIT WHERE IT’S DUE Secondary Market for Whole Loans is Deep and Active By Jim Reber President and CEO, ICBA Securities, ICBC Preferred Provider and ICBC Associate Member Anecdotally and empirically, community bank lending has been relatively productive during this multi-year rate cycle. Many conversations I’ve had with bankers in all regions of the country sound alike: Loan demand has been healthy, and even better, credit quality has held up very well even though rates hit a 15-year high toward the end of the year. It sure seems like the industry learned its lessons from the last big downturn just prior to the Great Recession. Through September, lending activity by community banks had improved about 5% year-over-year, and reserves had increased only about half as much. Virtually all loan sectors showed growth, especially consumer loans. The resilience of the domestic economy has been on display through the appetite for credit, although the aggregate rate hikes may be finally taking their toll. The Federal Reserve’s quarterly senior loan officer survey released in October indicated tightening credit standards, higher borrowing spreads and declining demand for C&I, commercial and residential mortgages, and consumer loans. That pretty much runs the gamut. SHAKEOUT COMING? As 2024 gets underway, the lending market is perhaps at a crossroads. To be sure, loan demand is never uniform across the country, and various regions could see differing levels of borrower health and availability of credit. It’s been well documented that mortgage rates are more than double the average homeowner’s outstanding cost of borrowing, which was around 3.70% late in 2023. It may, therefore, be time to revisit the robust secondary market for performing, highquality, non-conforming loans. The conversation with a potential seller of whole loans often begins with a concentration issue. Perhaps a bank’s portfolio has too much longer-duration fixed rate credits. Or maybe it’s exceeding policy limits as it relates to sector weight in consumers or commercial real estate. Or, possibly, a given loan production office has created too many loans in a given geographical area. If so, analysts can help your team identify saleable blocks of your loan portfolio and estimates of secondary market prices. It’s also possible to negotiate the servicing of these blocks as either retained or released by the seller. 12 | INDEPENDENT REPORT
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