To Sell or Not to Sell: Should Community Banks Sell Residential Loans to Secondary Market or Not?

Community Banks, at their very core, are institutions that through their lending activities help maintain the stability and finance the growth of the areas they serve. Community financial institutions are able to offer a full array of lending and investment products just like the “big boys” due to technology, access to products and some industry standardizing. This has allowed the smaller, community bank the opportunity to retain more of its borrowing base and provide cross-selling chances.

However, many of these community based institutions have decided not to offer long-term, fixed rate residential mortgages. While there are many reasons, primarily it is due to the regulatory environment which surrounds these loans. Yes, the residential lending business has had more than its fair share of regulations of late (Dodd-Frank, TRID, lender compensation, and many more).So what does a potential borrower do if their neighborhood bank does not offer the desired long-term fixed rate product?

The borrower goes elsewhere. Perhaps the borrower goes to a mortgage broker who has no desire to cross sell as the broker has no other products to sell. But what if that broker sells the loan – including the servicing rights – to a large bank? That broker has just provided the community bank’s competition with the most important profile: the borrower’s financial picture with all the details. In today’s highly technologically advanced world the borrower has become potentially a highly sought after prospect. While the community bank has the products to compete, do they have comparable marketing and cross-selling capabilities? Most likely No.

What if the borrower goes to another bank for his/her long-term fixed rate mortgage? Now the relationship between the big bank or other competing institution and borrower has become even closer and more of a chance the community bank will lose out on other lending products. All because the initial community bank would not offer a product which is available. Not only is the product available but the relationship with the vendor can be structured basically risk free.

Perhaps the question should not be whether or not to sell residential loans into the secondary market, but rather, would you be willing to offer a borrower a product in which you can earn fee income, basically risk free, and continue to have an on-going relationship which could turn a borrower into a bank customer?

Dear Community Financial Institution,

We at Flat Branch Mortgage Services can offer you this opportunity and I would appreciate the opportunity to discuss it all!

Patrick Benoist
Vice President
Flat Branch Mortgage Services