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Leaning into the lending landscape’s next normal

Financial services experts share their outlook for various lending types in the near future as the economic recovery begins its comeback.

Aug 26, 2021 / Consumer Banking

As consumers hope the country will soon emerge from COVID-19’s siege, Aben Hill anticipates they’ll begin to spend and borrow more in the next 12 to 18 months.

But Hill, chief lending officer for Rivermark Community Credit Union, a $1.1 billion credit union based in Beaverton, Oregon, says business owners appear to be more cautious. “It’s been difficult for small business to operate efficiently … They also face challenges of hiring and retaining employees.”

Financial institutions are eager to lend, given the surplus of consumer deposits that built up during the pandemic. Deposits at financial institutions are on average 20% to 30% higher than they were before the pandemic, Hill says. “But when you’re not lending at a 20 to 30% higher rate, then deposits can become a liability.”

Dustin Allen, senior director at Nomis Solutions, a San Francisco-based provider of pricing and profitability management strategies for financial institutions, says consumers have money to spend. “They have paid down their credit cards, they have been getting direct stimulus, they have been saving money.” But things are about to change as government programs wind down, he says.

Here’s how the lending landscape may shake out for the remainder of 2021 and into 2022.


Hill expects the traditional spring home-buying season will go longer this year, boosting mortgage demand. “COVID forced a lot of people to sit on the sidelines. There was a lot of uncertainty, primarily based on job concerns.”

With so many people spending so much time at home, they realized they either needed to renovate or to buy another home, Hill says. But with a recent lack of construction and low inventory, people need to be patient amid a national seller’s market.

“There is a lot more competition for a limited number of homes, prompting bidding wars that can raise prices from 20 to 30% or more,” Hill says. So long as mortgage rates remain at rock bottom, the market will be brisk, even in the face of high home prices. “The rates can only go up at this point,” Hill says. When they do, the market will begin to cool.

Mortgage refinancing

“We are seeing a significant decline in refinancings,” according to Hill. “The re-fi boom should have only lasted 24 months, but we are already into the 36 to 48-month range because of the historically low rates.”

But the rates have apparently bottomed out and most people who wanted to re-finance have already done so. “Those who haven’t may be having some pandemic-related credit challenges, or the re-fi closing costs may be prohibitive,” Hill adds.

Commercial real estate

“This area has been muted to say the least,” Allen says. “The only commercial real estate that’s appealing right now is multifamily housing. Anything related to office space or retail strip malls is lacking.”

According to the National Association of Realtors, acquisitions for large commercial real estate―properties or portfolios of at least $2.5 million―fell 28% in the first quarter of 2021. Transactions fell across all property types, except for hotel acquisitions, which investors could be buying to convert into other uses, such as multifamily housing.

Small-business lending

This market has been flat. “(Small businesses) are trying to figure out the new normal in terms of operating their business,” Hill says. “It is significantly different today from how they operated their business in 2019.”

As the lending landscape evolves beyond the pandemic, alternative lenders will play a growing role. For example, in 2011, the top five U.S. banks originated 50% of all mortgages, according to the 2020 Business Insider Intelligence’s Online Mortgage Lending Report. Their market share has fallen to 21%, largely due to the rise of neobanks and other alternative lenders.

Elena Ionenko, cofounder of Austin, Texas-based TurnKey Lender, a digital lending software maker, says it’s not just the banks and non-banks that are redrawing the lending market. “It is any business that provides goods and services and offers some sort of credit, including retailers, manufacturers or health-care providers. They are expanding their credit operations very rapidly with innovative lending approaches—invoice financing, merchant cash advances, buy-now-pay-later options.”

During the pandemic, she says, some large banks struggled to process PPP applications. “But the non-bank lenders and the small community banks handled the PPP process much better. The fintechs did well because you could do everything online. They have all the underwriting algorithms already in place.”

Edmund Lawler is a BAI Banking Strategies contributing writer.

Learn more about where lending opportunities lie in the BAI Executive Report “Where banks fit in the new world of lending”