Tuesday, March 21, 2023

As bank failures unfold, investors, regulators, businesses, and everyday people are looking at which financial intuition is going to be the next Bear Stearns, Washington Mutual (WaMu), or Silicon Valley Bank. Ultimately the public will have in-depth reports (and probably even books) on how these failures happened. Fundamentally, these firms held large amounts of concentrated risk without a coherent, fully developed strategy for  asset and liability management (ALM).

For Bear Stearns, its downfall was exposure to mortgage-backed securities — and then doubling down on those investments when the proverbial [expletive] hit the fan. WaMu had a focus on risky mortgage lending and an untenable expansion approach. For Silicon Valley Bank, its concentration in tech-backed start-ups and the bank’s high proportion of held-to-maturity (HTM) securities ultimately led to its demise.

To explore bank concentration risk in more detail, fintech entrepreneur, former financial analyst, and friend of Calcbench Marvin Chang did some sleuthing on banks and home lending asset trends. Chang evaluated more than 20 banks, ranging from the big national banks, to super-regionals, regionals with under $80 billion in assets, down to local community banks with under $10 billion in assets.

Figure 1, below, is a sample of what Chang found. It shows the different growth rates in home lending for the various sizes of banks. 

Overall, asset growth has been muted at national banks over the past four years. Home lending (mortgage and home equity) at these institutions has been declining from 2018 through 2022. With the one exception of Wells Fargo ($WFC), home lending is a single digit percentage of total lending at each of the big banks.

At super regional banks, regional banks, and local community banks, the story is different. From 2018 through 2022, asset growth was more accelerated, and mortgage lending rose. Often, the smaller the bank (in asset size) the more aggressive they’ve been in real estate which is interesting given that home lending has increasingly become a scaling/technology game.  

For super-regionals, the focus has been on home lending which hovers around 23 percent of total lending in 2022; at regionals with less than $80 billion in assets, home lending is 26 percent of total lending that same year.

As Calcbench first reported last summer, with interest rates on the rise, real estate lending has fallen off a cliff. For super-regional and regional banks specifically, Chang recommends taking a deeper look at their portfolios to understand what shoe might drop next.

Using Calcbench to do this research was easy, or as Chang says, “it’s like riding an electric bicycle.”

To download Chang’s detailed spreadsheet and see the tags he used with his Calcbench’s Excel Add-in, click here.

About the Author

Marvin Chang is currently chief commercial officer at digital lending platform Revvin. He has led digital transformation programs at Caliber Home Loans, which enabled this top mortgage lender to achieve a 10x increase in loan production via digital channels. There, he cultivated relationships with many of the leading residential housing value chain disruptors. At First Data, Chang led efforts to build innovative consumer loans propositions, focusing on point-of-sale and buy-now-pay-later lending. While overseeing international business development, Chang set up the company's venturing arm in India to tap into the market’s payment innovation. At Citigroup, his leadership in managing the legacy mortgage portfolio helped turn the mortgage holdings unit into a steady generator of returns. At Morgan Stanley, Chang held innovation leadership roles within the institutional research unit.

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