Some Seattle banks thrived in pandemic by axing single-family loans

These are strangely good days for local bankers.

Sure, home sales in Seattle and elsewhere have tanked under high interest rates, and prices are finally drifting down. The once-lucrative refinancing business is comatose.

Even the “crypto millionaires” who had been “buying up beautiful homes along Lake Washington” have largely vanished, says Brent Beardall, CEO of Seattle-based WaFd (formerly Washington Federal) and a veteran observer of the Seattle housing market.

Yet despite the slowdown, some of the local banks that serve the Seattle area have done well.

WaFd, which operates in Washington and seven other Western states, just posted the best yearly results in its 105-year history, breaking records in everything from profit to loan volumes. Several local competitors — among them Seattle-based HomeStreet and Tacoma-based Columbia Bank — also reported good results.

That’s partly a reflection of the banks’ individual strategies during several years of pandemic-related turmoil. But it also illustrates how much the housing business has changed since the Great Recession, when many banks were wiped out by bad loans — and how those changes will probably keep playing out even after the pandemic fades and the Seattle-area housing market recovers.

Some of the banks’ against-the-grain performance is due to the recent rise in interest rates, which have allowed banks to charge more for the loans. Although banks themselves are also paying higher rates on funds they lend, those rates “haven’t gone up as fast, and therefore we’re getting that expanding margin,” Beardall says.

Many banks also benefited by administering pandemic-related relief programs. Some community and regional banks, for example, actually grew their loan business, despite economic uncertainty, by offering Paycheck Protection Program loans to small businesses. Half of WaFd’s 10,000 PPP loans went to nonclients, some of which have since become WaFd customers.

All told, gross business income for Washington’s banking sector actually increased, by nearly 2%, in the first two years of pandemic, state revenue department data shows. Overall business income grew by 5.4%, to $266 billion, in the same period.

But bankers are also benefiting from deeper changes in the way housing gets financed.

For example, even though Seattle-area housing has boomed for much of the last decade, many local banks have been moving away from consumer mortgage lending, for several reasons.

First, the home mortgage business is painfully volatile. When interest rates are low, “you’re making lots of money because there’s lots of refinancing and home sales are typically good,” says Mark Mason, CEO at HomeStreet, a Seattle-based regional bank with branches in Washington, Oregon, California and Hawaii. But when interest rates climb, Mason says, mortgage and refinance “volume gets cut by more than 50%.”

Lower loan volumes can translate into lower profits — and unhappy shareholders. WaFd, Columbia and HomeStreet all are publicly traded companies and recently have seen wide swings in share prices.

Second, profits on home mortgages are getting squeezed. One reason is that post-2008 banking regulations have raised lending costs. Smaller banks also face growing competition from low-cost, nonbank lenders, which now handle more than half of home mortgages and refinancing, according to federal data.

As a result, banks now often make less on a 30-year fixed-rate residential mortgage than they can on other kinds of loans, notably the shorter-term, variable-rate commercial loans that many businesses prefer, and which many local and regional banks now prioritize.

At WaFd, residential mortgages now account for less than 35% of the bank’s total loan portfolio, down from nearly 50% in 2019.

At HomeStreet, mortgage-related business makes up just 7% of revenues, down from around 35% in 2018, Mason says. He expects the bank to pursue even more commercial business lending in the near future — or at least until “mortgage rates normalize and housing prices moderate,” he adds.

Those shifts are part of broader changes in banking.

Smaller community banks and regional banks especially face growing pressure from bigger banks, which have the resources to, for example, reduce compliance costs by automating loan processing.

That pressure has pushed some smaller banks to focus on lending niches such as apartment construction or banking services for wealthy clients, says Glen Simecek, president and CEO of the Washington Bankers Association.

Other community and regional banks have sought increased scale and resources through mergers — as with the recently approved deal between Columbia Bank and Umpqua Bank.

Meanwhile, pressure to control costs, combined with a lingering pandemic labor shortage and the popularity of online banking, has accelerated a trend toward branch closures. (About 45% of customers prefer mobile banking, according to a new industry survey.)

Seattle alone lost at least 87 locations, or nearly 10%, since 2017, according to the National Community Reinvestment Coalition.

These changes don’t mean Seattle-area banks are abandoning the housing market. But many are focusing increasingly on the commercial side of housing. Since 2019, WaFd and HomeStreet have both roughly doubled lending on apartment projects, which can be more profitable than single-family homes, especially in markets such as Seattle where rents are escalating.

Multifamily loans “have historically been one of the safest loans to make,” says HomeStreet’s Mason.

Apartment lending isn’t risk-free. During the pandemic, some investors were skeptical about apartment projects in downtown Seattle due to uncertainty over remote work and concerns about security. “Is anyone going to want to live there?” Beardall recalls investors asking about downtown projects.

But Beardall expects downtown Seattle’s housing market to recover eventually, and he and other bankers say they’re similarly bullish on a regional housing recovery.

But those forecasts come with plenty of caveats.

Recovery could take a while. The Seattle area’s red-hot housing market was fueled by years of unusually strong local hiring, especially by tech firms. That suggests a recovery will drag out if recent hiring slowdowns announced by some tech firms get worse.

Indeed, if hiring slows too much, several bankers say, the local economy will probably slip into a mild recession, perhaps as early as late 2023. Beardall, for one, puts recession odds at 90%.

Prospective homebuyers also shouldn’t expect to see those ultralow interest rates from the early pandemic. Mason thinks it’s too early to know “where mortgage rates will stabilize.” Beardall thinks the “new normal” rate for home loans could be around 6%, which likely would deter some buyers.

And whenever it arrives, Seattle’s housing recovery likely will be weaker in market segments that were lagging before interest rates kicked up.

Single-family home sales and construction, for example, had already run into constraints that had limited the supply of homes. Those include zoning laws, soaring land costs and tighter lending requirements enacted after the Great Recession.

Some bankers expect those constraints to worsen even after interest rates fall. That likely means a housing recovery with even fewer single-family homes for Seattle-area buyers — and even more incentive for buyers, developers and bankers to consider other kinds of housing.

Put it all together and, going forward, new housing units in the Seattle area will be “disproportionately weighted towards multifamily,” Beardall says. Given the high costs of land and permitting, developers know they’ll get “more doors, more density” and better profit on multiunit apartments than on multiple single-family houses.

There will still be demand for single-family homes in and around Seattle. But absent some dramatic collapse in home prices — the median single-family home in King County sold for $875,000 in September — and given the possibility of higher interest rates, demand will likely be even more concentrated amongthe higher-end buyers that were already starting to dominate the single-family market before the slowdown.

Before the recent downturn in tech stocks, tech workers routinely used stock options to make down payments — and bankers expect that to resume once tech share prices rebound.

Other big spenders may not be back.

Beardall doesn’t expect crypto millionaires to pour back into the Seattle-area housing market, in part because he doesn’t expect crypto prices to hit their recent highs.

“I kind of knew it was at its peak when Matt Damon started doing the Super Bowl commercials,” Beardall says.