Mortgage lending is looking like a ripe target for bank growth these days: refinancing rates are still low, other income areas are relatively stagnant, and the demise of hundreds of mortgage companies has left the market open, resulting in a lot of loan officers looking for work.

Meanwhile banks are reacting accordingly, consultants say: some banks are merely working harder with what resources they have, while others are making big strategic changes such as creating divisions and hiring new loan officers.

“The opportunity is there for any community bank right now,” said George Darling of Newburyport-based Darling Consulting.

But industry experts caution that banks shouldn’t get too carried away by their enthusiasm – rates have spurred a fast-paced refinance market, but the drop off can be dizzying if rates change.

“Some of these things are so short-lived,” said William Kozak, a Rockport-based consultant with WTK Associates. Kozak has talked some clients down from their recent residential exuberance, warning them against making large resource allocations and strategic re-positioning that locks them into a long-term commitment to residential lending.

“If I’m advising a client, I suggest to them that if this is going to be their focus, if it starts to wane, they have to treat it like a business and the people in that division need to be reallocated or moved out,” he said. “And that’s something that banks have not been very good at [in the past].”

That being said, residential lending does present a good short-term opportunity for many banks, he said, and many are taking advantage of it.

On The Up And Up

Jim Wilson, managing director with Connecticut-based consultancy Northeastern Banking Services Group, said his firm has urged many client banks to expand mortgage operations. Partly as a result, Northeastern Banking’s clients, usually with between $200 million and $2 billion in assets, have increased mortgage lending by 50 percent to 200 percent in recent months.

In some cases, that’s meant tackling mortgage lending in earnest for the first time: some newer or smaller banks had only done whatever mortgage loans they got by request from existing customers, he said, and so had done a minimal amount in the past. With commercial lending still relatively stagnant and new deposits low, beefing up the residential side makes sense, he said.

What’s more, Wilson has seen other banks use their residential lending as a way to attract more deposits: typically, the customer gets a rate reduction on the mortgage if he or she opens up a checking account with the option to do automatic mortgage payments to the bank.

Randolph Savings Bank expanded its mortgage division by seven people back in October, preceding the refinancing boom. President Thomas Drummey now says the bank is expanding yet again, looking to add a new Federal Housing Authority loan officer and processor.

Since establishing its new personnel last fall, Drummey said Randolph has seen its fees quadruple and its average mortgage closings go from about $1.5 million a month to $8 million.

Drummey said he’s aware of other banks jumping into the mortgage market, and knows it’s dangerous to do so without thinking long term. Randolph Savings is focusing on building up new purchase business, so as to protect itself from the vagaries of interest rates, he said.

Banks are using a variety of tactics to make best use of the nuances of the current market.

Fannie Mae and Freddie Mac’s loan terms are still tight at the moment, but Randolph sticks to loans that qualify under the agencies’ standards, Drummey said – although the bank is doing some portfolio lending right now, Drummey doesn’t want to get “stuck with that paper” for the long term. With rates so low, a long-term mortgage will hurt the bank when rates rise again, he said.

Other banks are getting creative to work around the tight loan standards, Darling said, and use portfolio loans that employ adjustable rates – banks can pick up revenue from the secondary market, as well as keep a portfolio of shorter-term assets.

“It’s important that you get a range of in-house products,” he said. About one in three applicants are getting turned down by Fannie and Freddie, so a bank is smart to have portfolio products that it can whip out and offer the applicant.

Salem Five Mortgage Company keeps most of its loans on the books, a strategy that has served it well in this market, said Ed McDonald, the mortgage company president. His company has about 50 loan officers, and added staff since rates went down at the end of 2008.

McDonald acknowledged that the refinancing boom could easily cool, but said the large gap left in the market from dead mortgage companies has left his company confident that it won’t get burned.

Salem Five is meeting the current rush by working overtime and looking for yet more personnel to keep up forward momentum.

“We’re still looking for a couple of good underwriters,” he said. “Between the low rate environment and the growth mode we’re in, we anticipate a really brisk amount of business for the foreseeable future.”