An important issue for community banks to consider is the mortgage program that the President alluded in his State of the Union address. The administration clearly understands that it needs to do something dramatic to turn around the residential real estate market. There has been talk about a “rescue” program that would allow a mass refinancing of higher coupon mortgage loans that would save the average consumer $3,000 a year on interest expense. Plus there is an added bonus of the big banks (that benefitted most from the mortgage fraud) being surcharged to support the program. A program like this could have the following impact on community banks:

•Positive Impact:
o An enormous refinancing binge which might result in significant gains on sales of loans and servicing income.

• Negative Impact:
o The loss of interest income on loans that have high coupons (5% and over) that are refinanced and sold into the secondary market as part of this program.
o The acceleration of the premiums on mortgage products (mortgage –backed securities and CMOs) that have been purchased with high premiums particularly 15 and 30 year securities with coupons of 4.50% and higher.
o The acceleration of mortgage servicing rights expense on higher coupon loans.

We think the potential negative impacts far out-weight the positive impact from such a program and would recommend that community banks assess the financial impact on their institution of such a program as part of their overall risk management process.

We would be happy to help you assess the impact on your institution. Just give us a call.