Consequently, community banks retain 100 percent of the credit risk of these loans and have no incentive to make loans without regard to the consumer’s ability to pay.
But because community banks hold the loans on balance sheet, they may charge higher rates than those for prime GSE loans or include balloon payments to account for the liquidity and interest rate risk of holding the loans in portfolio. Further, community banks with small portfolios do not realize economies-of-scale so their costs are higher.