Rising interest rates begin to impact bank lending

Shelby White//September 21, 2018

Rising interest rates begin to impact bank lending

Shelby White//September 21, 2018

However, there has been a slight drop-off this year in other forms of lending, namely refinancing and home-equity loans.

The decline is fueled by rising interest rates, which make loans more expensive.

The average interest rate on a 30-year fixed-rate mortgage rose to 4.5 percent in September, up from 3.78 percent for the same month last year, according to Freddie Mac, a provider of capital for mortgages.

The increase follows a long period of falling and flat rates in the wake of the economic downturn in 2008 and 2009.

“Falling rates are over. If your business is just doing refinance, it’s over. If you don’t adapt, you die,” said James Dietch, CEO of Teraverde, a financial consulting firm in East Hempfield Township.

For some of the largest banks, adaptation has meant job cuts.

California-based Wells Fargo & Co., which has branches throughout the midstate, laid off more than 600 people from its residential lending group. Its mortgage banking income fell to $770 million for the second quarter of 2018, down from $934 million for the same period a year ago.

Community banks in Central Pennsylvania likely won’t follow suit, said Jeffrey Marsico, executive vice president of bank consulting firm The Kafafian Group Inc. based in New Jersey with an office in Bethlehem.

Easing access

A bipartisan push is underway in Congress to make the home mortgage process easier for self-employed and “gig” economy workers.

It is represented by a bill called the Self-Employed Mortgage Access Act, and it would ease restrictions on documentation of borrower income.

Introduced Aug. 28 by U.S. Sens. Mark Warner (D-Virginia) and Mike Rounds (R-South Dakota), the legislation would allow lenders to verify an applicant’s income using forms of documentation other than the W-2 tax form.

“An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment. Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income,” Warner said in introducing the bill.

Borrowers with multiple sources of income, like Lyft and Uber drivers, can find it difficult to get loans because they may require pay stubs, W-2s or other traditional documents, said James Dietch, CEO of Teraverde, a financial consulting firm in East Hempfield Township.

The legislation may ease the requirements, but it still sets high standards for documenting income, Deitch added.

The legislation would allow self-employed and freelance workers to submit the following forms:

  • IRS form 1040 schedule C for sole proprietorships
  • IRS form 1040 schedule F for farming
  • IRS form 1065 schedule K-1 for partnerships
  • IRS form 112-S for S corporations

“They don’t like mass layoffs during low volume times,” Marsico said. “They will just accept the lowered profitability in those units.”

To mitigate any losses, smaller banks may look to attrition to adjust their employee base over time, Marsico said.

Some local banks have ramped up mortgage lending over the last few years as home sales bounced back from their lows of the Great Recession.

Their numbers are still climbing, at least when it comes to loans for buying homes. Refinance and home-equity loans, however, are slipping.

Ephrata National Bank has spent the last four years growing its mortgage lending. It is still growing.

The bank’s consumer real estate lending totaled $266.3 million in the second quarter of 2018, up from $249.3 million at the same time last year.

“We’ve been able to grow the business pretty consistently since 2015,” said Craig Rodenberger, a spokesman for Ephrata-based Ephrata National Bank, which has 12 branches in Lancaster, Lebanon and Berks counties.

Indeed, it saw a big leap in 1-4 family residential mortgages, reporting loan volume of $192.3 million this quarter, up from $176.97 million for the same period last year.

Home equity loans, however, dropped to $10.2 million in the second quarter of this year, down slightly from $11.2 million in last year’s second quarter.

A similar story is playing out at York Traditions Bank, which opened a Traditions Mortgage division in 2010.

But the York Township-based bank focused on loans for home construction, purchase and renovation loans, but not as much on refinance loans, a decision that may pay off as interest rates rise, said Teresa Gregory, president of Traditions Mortgage.

Real estate loans for York Traditions totaled $292.7 million in the second quarter of 2018, up from $279.5 million for the same time last year. The bank has a half-dozen branches in York County, and a mortgage office in Camp Hill.

While the housing market isn’t robust, Gregory said, it’s not falling off a cliff either.

“The fact that there’s more buyers than there are sellers, those buyers aren’t necessarily going away, it’s just taking them longer to find their dream home,” Gregory said.