A Closer Look at Residential Loan Yields

In the August 2025 edition of On the Home Front, we handicapped residential and commercial loans in their contest for balance sheet space.  The general result was that residential had a valid place on every balance sheet.  At the time, we gave an advantage to commercial loans for yield.

Since then, we dug a little deeper into yield question, specifically the Return on Regulatory Capital, using a recent scenario.  When we looked at September 30, the competitive 5/1 adjustable mortgage rate was 5.875%, 30-day SOFR was 4.33%, and a 5-year fixed swap rate was 3.24%.  We hedged 20% of the new portfolio balance with a swap and paid 1.5% premium to buy the loans.  All in all, the average loan spread to funding in the first year was 1.76%.

Comparing Residential and Commercial Loan Returns

But how do we compare a residential to a commercial loan?  The approximate Loan Loss Reserve rate we use for residential loans here is .5% and the rate for a commercial is about 1.0%.  The Capital Risk Weight for residential loans is 50% while commercial loans carry a 100% weight. 

That is a slew of numbers to get to the point, a commercial loan must generate a yield almost 30 BP higher (6.16%) than the residential loan (5.875%) to produce the same Regulatory Return on Capital (14.9%).  If that is not the case, the residential loan wins in six of the approximately ten categories that CEOs and balance sheet managers consider.  I have attached the chart from the August issue for reference.  Just imagine the star in the first row moving over to the Residential column.

It's worth taking a closer look at residential loans on the balance sheet.  Even with the purchase premium, they can be competitive with commercial.  Please let me know if you’d like to learn more!

Steve McHugh
VP Community Bank Relationship Manager
781-544-2648
steve.mchugh@leaderbank.com

Moving the Needle on Deposits

Reliable core deposits are the foundation for community bank and credit union balance sheets. It’s no wonder larger banks offer “bounties” worth hundreds of dollars to snag checking accounts with periodic direct deposits. Clients dread unraveling the web of payroll, monthly autopay, investment account, bill pay, Zelle, and other sticky connections, even if the incentives seem compelling. It’s just not worth it until a major life event crops up…like buying a new home.

Last year, Leader Bank ramped up our efforts to increase deposit balances associated with residential lending. We emphasized a streamlined onboarding experience to eliminate the administrative heavy lifting for clients while providing the individual, white glove, service they need to be successful. We focused on three areas: leveraging data and system connections, personal bankers, and appropriate pricing incentives.

Leveraging data

More than 90% of the information needed to open checking and savings accounts is collected during the mortgage application process. For interested borrowers, we weave the necessary deposit documents into the closing process for signature. The resulting data is translated into an Application Program Interface (API) that connects to our core systems.

Personal bankers

New deposit clients receive a customized welcome letter from a personal banker one day after account opening. The personal banker ensures an easy transition with online banking, debit card, initial checks, and education on high-yield savings and CD products. 10 days later the personal banker checks that sufficient funds are in the account for the upcoming loan payment. Our personal bankers check in with their clients quarterly to ensure their service expectations are being met.

Pricing incentives

Home equity borrowers are eligible for discounted loan rates and premium savings rates if disbursements and instalment payments are done directly from the associated core checking account. Primary mortgage borrowers receive discounted loan rates if their monthly payments are drawn using Leader Bank’s Autopay feature.

Deposit Increases

We’re very pleased with the results for residential loan-related deposits. Over the last 18 months:

• The number of residential checking accounts has increased by 60%.  
• The monthly average checking account balance is over $5,000.
• The aggregate checking and savings balance (excluding CDs) grew by 16%.
• The aggregate cost of funds remains more than 200bp below Federal Home Loan Bank advance rates.

The outlook is very positive as we fine tune our processes and increase scale.  We look forward to extending our system to community residential lending partners. Partners that choose to service the loans they purchase from us will get both high-quality assets and reliable core deposit relationships.

Steve McHugh
VP Community Bank Relationship Manager
781-544-2648
steve.mchugh@leaderbank.com

Community bank and credit union CEOs often contend with competing requests for balance sheet space from different lending departments.  A common dynamic pits residential lending against commercial lending.  It’s true that yields for commercial loans usually beat residential, but given the lower risk profile and preferential capital treatment all balance sheets should have room for residential lending. 

Take a look at the following chart:

Residential potentially comes out ahead in five of the approximately ten categories that CEOs and balance sheet managers consider.  Residential lending, particularly done with scale, can provide stable and consistent risk-adjusted returns. 

Additionally, for those banks who place extra importance on liquidity in these uncertain times, residential lending will provide greater borrowing capacity available at the FHLB thereby not reducing the off-balance sheet liquidity ratios, with minimal set up requirements.  

While typical pre-pay risk favors commercial, consider two factors – loan officers must enforce those fees in a competitive environment and there are residential products that contain prepayment features.  

Adjustable-rate residential mortgages in particular allow for a reset feature that can create better predictability within asset/liability modeling vs. longer-term residential or commercial loans.

Every financial institution and loan portfolio is different based on their market, capital, charter, and expertise.  Residential lending has a valid place on every balance sheet.  

Steve McHugh
VP Community Bank Relationship Manager
781-544-2648
steve.mchugh@leaderbank.com

The Appraisal

Large national companies are investing in technology to capture more residential buyers and bypass local realtors and community financial institutions.  In just a few years, artificial intelligence systems may target prospective clients when they are ready to buy, promote available homes in their communities, and arrange financing.  Unless we are proactive, community institutions may eventually follow Blockbuster and F.W. Woolworth out the door.

Leader Bank balances technology with personal relationships to thrive in this new environment.  Buying a home is complicated and expensive. Sellers, realtors, and buyers have to trust the financial institution that makes it all possible. We work hard to earn their confidence.

For example, from November to April, Leader offers extensive education to realtors about financing options and various bank products that make a difference for buyers and sellers.  We are also working with clients to pre-qualify them to compete with cash buyers for the homes they want.

When new listings start coming out in the Spring, we demonstrate the speed and consistency that have made us the top purchase lender in Massachusetts. We use the latest technology to handle the flood of activity during these peak months.

But we couldn’t maintain our market position without the cooperation of our local and national investor partners.  Community institutions leverage our capabilities to generate quality assets and new customers in their areas.   Local partners gain access to our expertise and team, positioning them to meet the diverse needs of their portfolios and drive growth in their communities.

Sean Valiton - Head of Residential Lending

The Weather Forecast

The Fed’s preferred inflation measure is in for the month of April.  Over the past 12 months PCE inflation has increased at a 2.1% pace, while Core PCE has increased at a 2.5% pace.  Both measures continue to decline closer to the Fed’s 2% long run target.  Core PCE has declined from the 2.8% rate it ended last year at, and the 2.5% pace is the lowest since all the way back to March 2021 prior to the pandemic.  From the prior month both the headline and Core PCE increased by 0.1%.  Also included in the report disposable personal incomes rose by 0.8% from the prior month, showing continues wage growth allowing consumers to afford higher prices.  While this measure on price levels is still somewhat backward looking there does not appear to be any negative effects from tariffs.  At this point any tariffs appear to be covered through importers margins.

Additionally related to tariff impacts, the US trade deficit shrunk in April to $87.6 billion, a decline from March’s $162.3 billion; marking the largest monthly decline on record.  Goods imports fell by 20% while exports rose by 3.4%.  In recent months leading up to the tariff announcement on April 2nd many companies had pulled forward imports in anticipation of expected tariffs which were a large part of President Trump’s campaign promises.

The University of Michigan today published its latest survey results on consumer sentiment, posting an increase from mid-May preliminary data.  May’s consumer sentiment levels are now flat to April’s reading at 52.2, ending four consecutive months of steep declines as seen in the chart to right.  This marks a 24% decline from May a year ago.  Sentiment rose during the latter half of May as excessively high tariff costs on Chinese imports were paused for 90 days while the two countries could negotiate more favorable partnership.  The survey showed that American’s remained concerned over the outlook for the economy in addition to personal finances stemming from stagnant wages.  Inflation expectations for the one year our increased by 0.1% to 6.6% while longer run expectations declined by 0.2% to 4.2%.

These three economic releases today point toward some positivity in the US economy which has seen its share of concern and volatility over the past few months.

Read more...

Patrick Sylvester - SVP, Capital Markets

The Work Room

At every community bank and credit union, residential loans compete for balance sheet space, staff, and resources with other products (Commercial loans are always preferred, right?…Maybe not?)  Retail lending is focused on adding quality assets and happy customers while maintaining profitability. Taking a close look at the process to manufacture a residential loan moves us nearer to realizing all three goals and staying relevant.

At Leader, we’re “mapping” every step in our residential lending process.   Over the last year, we’ve examined the paths for a variety of loans to identify opportunities for improvement.  We want to increase processing speed, improve the quality and reliability of service for clients, and reduce costs.  And we have made encouraging progress.  Since the project started, we have cut three days from our average loan approval time while reducing costs by five percent.  Longer term, we hope to reduce our residential loan approval time to ten days so our clients can compete effectively for the houses they want.

As a result of the mapping exercise, we also identified processing and underwriting as a significant opportunity to reduce our cycle time and improve the quality and consistency of our team.  We’re now evaluating artificial intelligence systems that “read” documents and compare them to the loan application along with underwriting guidelines to produce an underwriting draft.  The tool highlights portions of the application for additional review by an experienced analyst.  It is analogous to safety enhancements for cars in recent years, like “lane departure warnings.”  We’re not “self-driving” loan apps yet but following guidance to process them more efficiently.

Why does this matter?  As Sean Valiton noted in The Appraisal above, community institutions will need to balance technology with a personal touch to compete with national commodity players.  Leader Bank is investing in appropriate systems to stay ahead in the residential lending market.  Our community residential partners will benefit from our commitment to stay relevant in their local markets.

Eric Prue - FVP, Innovation & Consumer Direct Lending

The Appraisal

With the third quarter behind us and fall well underway, Leader is focused on the year’s remaining opportunities. September brought a temporary bump in refinance activity, but now we are back to building our market share. Leader is the #1 bank purchase mortgage lender in Massachusetts with 5.5% of the volume in September. And we have increased our position in New England and around the US. How have we done it? 

Much of our success over the past two years is based on the trust we’ve built as a reliable, purchase-focused lender. This trust has been invaluable in navigating a tight market, where low inventory and high competition have led some players to pull back. 

We have also tailored a differentiated product suite, designed to help clients navigate today’s market challenges. As a peer lender, you’re likely encountering some of the same issues, so I wanted to share what’s worked for us in hopes it can benefit you too.

Two programs that have been particularly effective:

• Move and Improve Line: This is a 5% equity line offered alongside our 80% first mortgage loans, enabling clients to access equity after closing for expenses like moving or small renovations. After the NAR (National Association of Realtors) settlement we shared with real estate agents how buyers could also use the Move and Improve line to pay for agent commissions. 
• Purchase Pass Program: With tight inventory driving demand for competitive offers, we’ve developed Purchase Pass, a fully underwritten commitment letter contingent on the client finding a home. To enhance this program’s appeal, we’ve added a 10-day closing guarantee, appraisal protection, and a high-yield savings account for the down payment, allowing clients to earn interest as they search. This program has not only helped clients compete with cash offers but also shown our responsiveness to current market dynamics.

These offerings distinguish us and our community correspondents from commodity, mortgage-only, lenders. They also help us support our real estate partners to better serve their clients.

We’re excited about potential partnerships to address the evolving mortgage market in 2025. We’re here as a resource and a partner, eager to explore opportunities together next year. 

Thank you for your continued partnership and trust in Leader Bank.

Sean Valiton - Head of Residential Lending

The Weather Forecast

CPI inflation readings for the month of October were released this week with headline CPI increasing by 2.6% over the prior year, and 0.2% from the prior month. While CPI was up slightly from the prior month’s annual pace this was in line with expectations due to the price level of a year prior. Core CPI, removing the more volatile food and energy prices, rose by 0.3% from the prior month and 3.3% from the prior year. Energy prices have been declining recently, which is helping to lower the headline inflation readings, while housing costs are remaining high and keeping core inflation readings higher. Housing costs are up 4.9% over the past year, and expected to remain challenging as home prices and interest rates remain high. Additionally, since the election results, the bond market has been moving to higher yields as the expectations around President Trump policies on tax cuts, tariffs and immigration while thought to be positive to economic growth are also likely going to put pressure on inflation.

October retail sales also were reported to the higher side of expectations this week, coming in at a 0.4% increase from the prior month and growing at a 2.8% increase over the past year, topping economists expectations.

Read more...

Patrick Sylvester - SVP, Capital Markets

The Work Room

Anyone with two or more children understands the importance of balancing their needs and interests to keep the family on an even keel. For the last few years, we have become comfortable with the reliable child…the Purchase mortgage. We all know that making Purchase mortgage loans is complex, with extensive guidance, requirements, documentation, and crucial deadlines. The deadlines also make the origination process predictable with a goal to finish within a defined rate lock period due to set dates on Purchase & Sale contracts.

Purchase mortgage borrowers are highly motivated and receive extensive coaching and care from the loan officers, realtors, and processing staff. Many buyers rely on us to guide them through to closing on their new home and are generally committed to sticking with the relationship.

Recently, after several years away, the wild child, Refis, banged back through the front door.  Within a few days, many of their demanding friends showed up too.  In late August, Leader’s weekly rate lock volume doubled almost overnight and caused the usual friction with the reliable Purchase mortgage child. Sure, the wild child may not need as much support, but they are also not as motivated by deadlines and can decide to run away to the competition on a whim.  And they expect their transactions to close within thirty days. How do you get them on a schedule and plan for food and sleeping accommodations, so they don’t leave early in a huff? How do you keep the whole family rolling along efficiently without hiring too many sitters, expanding the house, or buying too much takeout?

Each time the wild child comes home, we learn a bit more about how to deal with them. Four years ago, Leader increased investment in systems to streamline the refinance process.  For example, we used to alert borrowers to unmet requirements through freeform emails written by individual loan officers, underwriters, and processors.  That approach was personal, but variable, error prone, and slow. Now we have standardized workflows embedded in our loan origination system. Bank team members tick off outstanding items in a centralized portal to generate a comprehensive request to borrowers along with the reference material they need.  This step initiates a visible status queue that can be monitored by borrowers and bank staff alike.  It has made it much easier to manage our diversified pipeline and balance the workload for our staff efficiently. 

The wild child has quieted down in the last week or two, but more fickle friends are waiting around the block for the next significant rate change. Who can predict the economic or political events that could trigger another Refi boom in the next year?  Leader is focused on investing in systems and staff to keep the residential loan “family” happy for the long haul. 

Alex Clarke - SVP, Residential Lending

The Appraisal

As we move into the second half of 2024 Leader Bank continues to rank as the #1 Home Purchase Lender among Massachusetts banks with volume up 30% from last year. While this is excellent news, the purchase market remains very challenging. The high-rate environment and lack of inventory is creating a feeding frenzy among buyers and this highly competitive market is leaving first-time homebuyers struggling to find homes and have their offers accepted. At Leader Bank we focus on developing products that address the specific pain points in the current market to help our clients and partners which has helped us stay ahead, remain relevant, and push through these tough conditions.

Over the past two years, we have concentrated on helping clients make their offers stand out in bidding wars against cash buyers while ensuring that our pre-approval letters represent trust and confidence for both agents and sellers. Our success is rooted in the trust we have earned over more than two decades in the local market.

Designed to help in this specific market, our best tool has been Purchase Pass, a fully underwritten upfront commitment letter with a 10-day closing guarantee. By frontloading the entire underwriting process and carefully messaging what a full upfront commitment means, our clients are regularly beating out higher offers and cash buyers. Year to date we have had over 500 applications for Purchase Pass resulting in over 330 conversions (and counting).

As a peer community bank rather than a large mortgage company, we understand the importance of local clients, quality underwriting, and protecting a portfolio. We recognize the challenges of operating at a local scale without the advantages of a large national operations center. This perspective allows us to provide personalized, high-quality service to our clients and partners.

We view our relationship with our partners as a collaboration. We plan to continue sharing our insights and strategies to help us all succeed. We welcome your feedback and ideas as we navigate these challenges together, and we look forward to our ongoing partnership and shared success.

Sean Valiton - Head of Residential Lending

The Weather Forecast

Following the July jobs report coming in weaker than expected along with the ripple effect through global markets from the Bank of Japan unexpectedly raising rates there has been increased volatility in markets as traders and economists try to predict the direction of the economy and how quickly and to what extent the Fed will intervene.

The 10-year Treasury yield has been quite violent in its volatility, as has MBS pricing and equity markets. The 10-year treasury yield has fallen sharply from its 2024 high of 4.70% near the end of April to a recent intraday low of 3.66% to climbing back to 4.00%, and now hovering around 3.85% as of this writing. Looking over a shorter period, from the July 31st Fed meeting day close of 4.10% over the next 3 trading sessions the yield fell some 44 basis points to its low point; followed by an increase of 34 basis points. Equity markets also tumbled over this stretch with the DOW off a record high level of 41,000 falling more than 5% in just a few days to a low of 38,700; only to be followed up with the largest single day gain of the year once markets calmed down.

What does all this volatility mean? Expectations for the near-term future are uncertain; what seemed for sure to be the smooth soft landing for the economy from the decades high inflation now seems more in jeopardy as last month’s jobs data showed the labor market may have weakened. Rates are on the decline, but it may be a bumpy ride. However, we needn’t jump to conclusions too quickly over a single data point. 

Read more...

Patrick Sylvester - SVP, Capital Markets

The Work Room

Financing residential condominiums has gotten much tougher over the last several years. Since the June 2021 collapse of the Champlain tower in Surfside, FL, FNMA and FHLMC have tightened requirements for the “warrantable” loans they’ll purchase. More recently, rising property insurance rates have put pressure on condo associations to accept higher deductibles and more “carve-outs” for various perils (e.g. ice dams) in their master property insurance policies to lower costs.  Creative insurance agents are pushing the envelope with the agencies, leading to even more mortgages categorized as “non-warrantable.” Mike Girard, VP, Residential Underwriting, Leader Bank, says “at a minimum, 1 in 5 condo loans are going back to HOA/Insurance for additional clarification/corrections/revisions”.

Automated underwriting systems have not kept up with this dynamic.  At Leader Bank, we work closely with realtors, insurance agents, and FNMA/FHLMC to qualify exceptions to meet the “warrantable” standard. When that is not possible, we may originate a mortgage with an exception that we believe is reasonable to accept if the note carries a higher rate. For example, if a borrower purchased an H-06 policy to cover a gap between the calculated deductible and the “warrantable” limit, we could make the loan with a rate 1-1.5% higher and keep it in portfolio or sell it to a community correspondent.

Condo lending is a complex, growing part of our market. Community correspondents can take advantage of Leader’s position to generate quality assets and new customers in this key segment.

Alex Clarke - SVP, Residential Lending