The Lender Conundrum Today: Innovation Vs Risk

The title of this month’s blog speaks about the current dilemma in the mortgage lending community.

Interest rates continue to be significantly above market lows of 2022, home prices remain high, and the overall ability of the borrower to think about a home purchase is handicapped by continued unknown household budget pressures from inflation, and wage increases.

So, how does a lender overcome these obstacles? The answer lies within the overall mindset and risk position that a lender is willing to embrace. Is the outcome to sit back and keep the business model the same, or is to be open to change with innovation? The answer varies by organization and the business model – IMB, Community Bank, Credit Union and Housing and Finance Agency though the outcome should always support the mission of serving homeownership.  Here is one example, I think, you should be considering:

AMR Products, are there benefits to offering ARM products? 

An Innovator’s Response to this question might be,

• ARM rates are lower than fixed rate financing.

• ARMS create more opportunities to increase production volume.

• Our loan programs need to be diverse to meet varied borrower life-planning objectives.

A Risk Manager’s Response to this question might be,   

• Arm loans are historically viewed as being a risky loan for the borrower due to interest rate adjustments and potential payment shock.

• Our organization would have to make a lot of changes – is the risk/reward benefit for more loan production volume worth the time and effort to change everything?

• How does this change our Capital Markets strategy?

• What is the value paid for the mortgage servicing rights?  We need to address the risk/reward, i.e. more production, borrower impact, and earnings.

• Is our Loan Servicing, or Master Servicer capable of servicing ARM’s?

  
  

The above example shows how the pendulum expands on the Risk Response level as compared to the Innovator’s mindset. This is where a culture of change needs to come to the table. Staying imbedded in traditional thinking and not willing to explore, assess other loan programs is guaranteed to hinder the ability to support homeownership.

In my February’s blog, I spoke about “The Stark Reality of Today’s Mortgage Markets.”  If you haven’t had a chance to read this I recommend you do so now, as it provides real-life payment examples and rate scenarios that still exist in today’s market. (https://www.blackfin-group.com/post/the-stark-reality-of-today-s-mortgage-markets)

Additional facts that support borrowers are ready for ARM loans is highlighted by the Mortgage Bankers Association, in their recent Q4 2025 Mortgage Bankers Performance Report. Industry chatter and other data analytics indicate that t ARM production volume is now broaching 20 - 25% of all loans originated. More specifically, nearly 51% of all loans originated had a FICO credit score above 750, and another 24% fell into credit scores ranging from 700 – 750.

From a risk perspective, this tells me that potential homeowners have learned how to manage their credit exposure and are more prepared to adapt to a payment adjustment that could happen with an ARM loan. That is, if they stay in their home for more than 5 to 7 years when the ARM adjustment would start.

So, is your organization’s mindset innovation or risk adverse?

For more information on how to analyze Capital Markets, Loan Programs and the complexities of execution and impact – reach out to the Capital Markets team at BlackFin.  Our diverse knowledge can be put to work for you so that leadership has all the facts.

Luana Slettedahl is a Partner with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements.  Her understanding of how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com