Nearly one-third of community banks plan for their mortgage operations to come up short of last year as regulatory costs and challenges make the sector less appealing, a new survey shows.
Out of 884 community bankers currently active in the mortgage space, 31 percent expect their institution's residential mortgage holdings at the end of the year will be less than their level last year, according to findings released by the Federal Reserve and the Conference of State Bank Supervisors.
Of those who anticipate reductions in the dollar value of their mortgage holdings, most pointed to increased regulation and compliance costs at the reason.
Notably, a nearly equal portion of respondents—28 percent—say their holdings will increase this year compared to 2014, thanks to increased demand for loans. The remaining share of respondents doesn't anticipate any substantial change.
As the primary source of credit for their areas, most community banks rely heavily on mortgage lending for their business. According to the survey results, 755 bankers polled listed one- to four-family mortgages as one of their primary business lines, putting it just above commercial real estate as the top business for community institutions.
Should banks increasingly decide to scale back their mortgage business, the consequences for local housing markets could be enormous, the report's authors explain.
"[R]esearchers and policymakers will need to evaluate the impact of how these banks respond to the new rules on the local communities in which these banks operate and to overall availability of credit, especially customized credit designed to meet the needs of the borrower," they write.
Some of the biggest rules affecting the mortgage sector at the moment include the qualified mortgage (QM) and ability-to-repay requirements, which are designed to excuse lenders from liability on defaulted loans so long as they prove they made a reasonable effort to determine the borrower's ability to pay back on their mortgage.
Though many lenders in the industry have announced their intentions to only generate loans that fit under the QM umbrella in response, 38 percent of community bankers said they're still making non-QM loans, "but only on an exception basis." A further 26 percent voiced their willingness to lend outside the QM space in general.
Twenty-nine percent said they haven't strayed from the QM protections.
At the moment, the vast majority of active community lenders say less than 10 percent of their loans made in 2013 do not comply with the QM guidelines, though a sizable share said 80 percent or more of their mortgages don't qualify.
The primary reason offered by banks with non-QM loans was "unaffordable debt-to-income ratio." Under the QM terms, a borrower's monthly debt payments cannot exceed 43 percent of their monthly gross income.