Pub. 1 2021 Issue 5

September 2021 | 21 Where does a community banker who’s interested in purchasing a collection of high-quality, high- performing, but nonconforming loans go to find such a package? MIKE HART Account Executive - MO, AR, KS mhart@myservion.com myservion.com We provide financial institutions and borrowers the support they need to reach their financial goals. Re-envision your mortgage strategy. partnership channels Correspondent Retail Wholesale Delegated Conventional FHA, VA, USDA Jumbo/Non-Conforming Quality control Contract processing Contract closing Servicing Appraisal review mortgage products additional services Servion Mortgage is a DBA of Servion, Inc. NMLS #1037 Equal Housing Lender Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. purchasers, for their part, and to their satisfaction, are usually able to review each loan file before settlement. It’s common for them to have some latitude in selecting favorable loans for their market footprint. I’ve also heard from loan investors that examiners generally accept this strategy, especially if the buyer can demonstrate that due diligence was performed pre-purchase and the loans meet the buyer’s own underwriting criteria. Popular Demand Several factors are at play that increase the number of community banks willing to buy another institution’s loans. First, traditional loan demand remains spotty at best, and, as mentioned previously, many banks have an overabundance of deposits that need to be put to work. For another, buying loans can be a way for the purchaser to efficiently diversify its geographic or product risk. And credit quality nationally has remained astonishingly solid, so possibly the most obvious downside is within tolerable limits. Of course, there wouldn’t be a secondary market for nonconforming loans unless they had higher yields than alternatives, including investment securities. That is certainly the case at the moment. There is a wide range of possible returns, determined by average lives, collateral and servicing arrangements, but it’s not uncommon for a high-quality loan package to have 150 basis points (1.5%) higher yield than a comparable bond. Secondary loan purchases can be a viable strategy for community banks seeking to build out a more complete balance sheet. ■