W GUEST ARTICLE What’s your choice for the term of the decade so far (that is, other than COVID-19)? In the last three years, a number of expressions have come into fashion, some of which have been worn out, used out of context, and deemed to be a blight on our vocabulary by linguists. I’m sorry to say these may be around for a while. Here are a few: • Virtual • Social distancing • Pivot • PPP • Zoom (which I’ve noticed has become a verb as well) • Supply chain • Hybrid Let’s stick with “hybrid” for a few minutes. This has gained popularity in several circles. Hybrid cars, powered by both fuel and electricity, now account for over 5% of new vehicle sales, and all major auto manufacturers are ramping up their capacity. Hybrid education programs, which have both in-person and virtual components, are likely to be with us for some time. And, in the investment world, hybrid bonds can offer an attractive risk/reward profile for community banks. Not a ‘20s Innovation Adjustable-rate mortgages (ARMs) have been around since the 1980s, and portfolio managers have coveted these investments that “wrap” the loans into a liquid security. ARM pools backed by Fannie Mae, Freddie Mac, and Ginnie Mae (GNMA) deliver all the normal benefits of mortgage-backed securities (MBSs) and more. In addition to the monthly cash flow, ARMs also can help control interest rate risk for banks that are exposed to rising rates. 2020 versions of ARMs are, at least initially, hybrids. This means there is a fixed rate period for between three and 10 years, after which the remaining principal will adjust frequently, either semi-annually or annually. The volume of ARMs that are true floaters right out of the box is so small that the agencies have a hard time pooling them. Also, there are periods in which hybrids are not particularly attractive for community banks, due mostly to (no surprise here) the price levels. I’m pleased to announce that 2023 is a year in which hybrid ARMs are available at market prices that an investor will probably like over the next few years. Borrower Profile Still, the vast majority of new mortgage loans are fixed-rate for the full term, whether 30, 20, 15, or 10 years. Over the last decade or so, only about 6% of new loans are adjustable, and that includes hybrids. So who are these borrowers who are statistical outliers? They really line up into two groups. The first are those who are barely on the cusp of qualifying for conventional (or FHA/VA) financing from a debt-load standpoint. Hybrid ARMs will typically be offered at a lower rate than fixed, as the lender has to incentivize the borrower to accept some interest rate risk. The second group consists of homeowners who expect to be in their homes for a defined, FIXED RATEOR FLOATING? HYBRIDARMsGIVEAN INVESTORBOTHFEATURES By JimReber, ICBA Securities ICBA LIVE 2023 ICBA Securities and its exclusive broker Stifel will present several Learning Labs at ICBA LIVE in Honolulu this March. For more information and to register, visit icba.org/live. 20 The Community Banker mibonline.org
RkJQdWJsaXNoZXIy ODQxMjUw