Filling the gap, but carefully (August 2008)

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Filling the gap, but carefully (August 2008)

One man’s poison is another man’s poisson, and some banks and savings institutions find fishing for home-loans more successful now that mortgage brokers and some smaller mortgage bankers have reeled up their lines and gone home. Better catches aren’t universal, however, and even the successful have found loans harder to land. Private mortgage insurance represents a major challenge.

By Steve Cocheo, executive editor, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Troubles among subprime lenders, and other mortgage market woes, bring added market share to some traditional bank and savings institution home lenders. But while it’s summer, the living ain’t easy

The mortgage applicant had an atypical proposal for the lender to consider, definitely not your do-it-blindfolded home loan. He was selling a home in San Francisco, and buying one in Sacramento. The catch was that, until he could sell the San Francisco home, the would-be borrower would be relying on his father-in-law, who had agreed to put up half the price of the Sacramento home until the applicant could repay him from the proceeds of the eventual sale of his existing home.

Under most circumstances, this would be something of a challenge. But right now, it might have been classified in the “snowball’s chance” column.

In the Sacramento market, mortgage brokers and other nonlender originators have left the business or pulled in their horns, leaving mortgage borrowers to face larger commercial banking and savings institutions that have grown conservative in a hurry. Some community banks, likewise, have tightened up.

This might have left the applicant above with no viable alternative, but The Merchants National Bank of Sacramento had no qualms.

“We portfolio all of our mortgage loans, so we can accept some of the minor difficulties that some borrowers have,” says James Pons, executive vice-president and chief credit officer at the $121.3 million-assets bank.

In this case, Pons not only believed that the arrangement would work out, but knew the father-in-law. He okayed the deal.

With the departure of some originators, and the reticence of some competitors growing, Pons says that “we’re benefiting.” The bank has seen its mortgage portfolio grow by about 20% through June of this year.

While Merchants National makes its mortgages on Fannie/Freddie accepted forms, in case sale of the mortgage should be desirable, it portfolios everything. It can do this with the fixed-rate loans that it sticks to because it structures them as shorter-term loans—seven or ten years, as a rule—amortizing over 30 years.

“This gives us a chance to reprice the loans,” says Pons. “Generally, if the borrowers meet their obligations, we don’t call the loans. We just rewrite them.”

Looking back on the subprime debacle, Pons says, “since about four years ago, we’ve been scratching our heads, asking, ‘Who’s buying all of this stuff?’”

Changing times for home lenders
Of course, Pons’ last question is a past-tense query now. We’ll explore more of what we saw in the course of a national round of calls in mid-July to bankers and thrift executives. But what we heard must be considered in context. Bank and savings bank mortgage lenders—indeed, real estate borrowers, home brokers, and many other players as well—have been dealing with an almost surreal mix of conditions in the last six months or so:

Capital firefighting. Washington has been working, in fits and starts for much of the time, on ways to “fix” the mortgage markets and to help borrowers who found themselves over their heads, or with the waters rising.

Good intentions with little payoff. Private efforts, notably through the work of the “Hope Now” coalition, have been underway, since late last year, even as Congress and the Administration (and presidential candidates) tussled over the governmental responses. The biggest share of the publicity that has made headlines about private-sector efforts has been government figures taking mortgage investors and related parties to task for not moving fast enough, and not generating big numbers. Yet Hope Now estimates the program has helped about 1.7 million homeowners stay in their homes.

Disappointments in refis. Meanwhile, bankers interviewed indicate that early hopes that conventional lenders like banks and thrifts could step in to refinance borrowers in bad loan types into mainstream products haven’t panned out.

“We’ve seen a handful,” says Deb Bochain, executive vice-president-retail banking, at Liberty Bank, a $2.8 billion-assets thrift headquartered in Middletown, Conn. “But some never had the income to support a mortgage.”

“We’re doing as much of it as we can. But the challenge we are facing is that in some markets, the borrowers are really upside down,” says Margaret Bond, vice-president and retail lending manager at $8.4 billion-assets Rabobank, N.A., which serves mortgage borrowers in central and southern California.

At Chicago’s $744.1 million-assets Liberty Bank for Savings, Bill Smigiel, chairman and CEO, says, “we’ll look at everything we possibly can, but often the people have such large prepayment penalties, it is hard for them to get out.”

Specters that nag and worry. “Everybody’s been trying to find their bearings, and then you have news like the stories about Fannie Mae and Freddie Mac, and I could just cry,” says Jacqueline Amato, president of TowneBank Mortgage, Virginia Beach, Va., a division of $2.6 billion-assets TowneBank, Portsmouth. News reports questioning the viability of the mortgage giants, and efforts to help, have some in the mortgage field in mental turmoil. The shuttering and reopening of $32 billion-assets IndyMac Bank, F.S.B., generated still more tremors.

Economic distress and concern. The old real estate adage of “location, location, location” takes on negative meaning when fuel prices factor into an already worrisome picture. Some lenders have already been seeing some impact. This is an overlay in states, such as Ohio and Michigan, that were already experiencing economic angst.

“There isn’t much mortgage market out there,” says Howard Boyle, president and CEO, Home Savings Bank, a $108.3 million-asset stock savings institution in Kent, Ohio.

Private mortgage insurance impact. Private mortgage insurers, already feeling their own pain as a result of troubles in subprime and more, have become more reluctant to provide coverage, some lenders say. This has led to growing interest in, and reliance on, Federal Housing Administration and similar federal and state governmental insurance and guaranty programs. In some markets, it appears to be the only way that low-down-payment loans can be made.

Slices of the mortgage pie
As ABA Banking Journal canvassed nearly two dozen lenders around the country, three broad groupings emerged:

Gainers at the edges
Most of lenders who reported increasing volume were on the east and west coasts.

“Much of the media attention that the mortgage industry has gotten over the last four or five months has benefited the banks,” says Chad Neiss. “We’ve seen more activity from the markets, as mortgage brokers have folded.” Neiss is vice-president, sales, for consumer and residential lending at Susquehanna Bancshares, Inc., Lititz, Pa. Susquehanna, a $13.1 billion-assets holding company that makes mortgages in Pennsylvania, New Jersey, and Maryland, has enjoyed its share of a shift to local bank lenders over the last six months. Neiss says volume is up over last year by about 20%.

“We’re picking up market share as the mortgage brokers go away,” says Massachusetts’ Chris Dunn, executive vice-president and chief operating officer at South Shore Savings Bank, a $947.6 million-assets thrift headquartered in South Weymouth, near Boston.

Dunn says his state has cracked down in force on mortgage brokers. “All of that is weighing heavily on people in that business,” he explains, “and it is forcing some out of the business.”

Coupled with improvements in the state’s markets, especially in the Boston metro area, many bank and thrift lenders that Dunn talks to have seen improvements in volume over 2007 levels. He says the market seems to be putting the worst of things behind it faster than other areas, in part because it didn’t develop a deep inventory of new homes that would now be sitting empty. As for his own institution, Dunn says that application volume is up between 15%-20% in the first six months of the year.

Dan Dintino, senior vice-president, residential and specialty lending at First Niagara Financial Group, an $8.1 billion-assets holding company in Lockport, N.Y., has also seen this effect.

“The small independent mortgage brokers and bankers don’t have outlets for products,” Dintino explains, “and the small mortgage bankers don’t have warehouse lines, so they are having to try to broker deals instead.”

As a result, in the upstate New York markets it serves, First Niagara has enjoyed a slight uptick in volume.

In Chicago, Bill Smigiel at Liberty Bank for Savings says that “with these guys leaving the market, it has created opportunities for us. People are coming to us because we have money.”

Some lenders report a development that they haven’t seen for some time: referrals coming from real estate brokers.

And lenders report shifts in preferences by borrowers. Take Connecticut’s Liberty Bank. Historically, this savings institution, which has seen a small gain in 2008, was a big biweekly mortgage lender, according to Deb Bochain. “There had been a drop in demand for these when option ARMs were available,” says Bochain. However, as the firms offering those exotic choices have withdrawn, there has been a renewed interest in the money-saving biweeklies.

In Michigan, “we’ve seen very little ARM demand, very little balloon demand, just traditional fixed-rate 15- and 30-year loans,” says Cynthia Lowman, president, United Bank Mortgage Corp., a wholly-owned subsidiary of United Bank of Michigan, Grand Rapids, $416.7 million-assets.

At South Shore Savings’ Dunn says that his organization has historically been a strong hybrid ARM lender, but his market, too, has shown a decided bias towards fixed rates. As rates have begun to tick up, however, he says, the beginnings of new interest in adjustables has been seen.

In some markets, banks and savings institutions have seen declines in overall volume, but the potential impact has been cushioned by gains from mortgage brokers.

Yet while mortgage brokers and mortgage bankers have taken their lumps, their part of the industry isn’t dead. Pockets appear to remain where the exodus of brokers and some mortgage bankers has not taken place. One example on the West Coast is Seattle.

“The broker business is still alive and well,” says Laura Lee Stewart, president and CEO at $270 million-assets Sound Community Bank. Sound Community is a savings institution that resulted from the conversion of a credit union.

“We have been holding our volumes up pretty well,” says Stewart. She says that Seattle-area prices have remained firm, so there are loans on the table for all players to go after.

Not only lenders on the coasts have enjoyed some market-share growth. Jim Hamby, president and CEO at $475 million-assets Vision Bank, N.A., Ada, Okla., says his bank has seen a pickup. He credits this in part to the perception of community banks as lenders who are in the game for the long-haul.

Holding their own, or somewhat
Has the exit of the broker fraternity helped Dennis Cardello’s Collinsville Savings Society? The Canton, Conn., savings banker says that “it’s a little hard to tell, because mortgage volume is down so drastically overall.” Cardello says that the $147.3 million-assets thrift has seen referrals from real estate brokers who were favoring nonbank originators during boom times. However, the Society’s overall mortgage volume is 30% of what it was 18 months ago.

“So many things are affecting our volume,” says Stephen Greene. Greene is vice-president of residential lending for EagleBank, $894.7 million-assets. He says the Bethesda, Md., bank hasn’t seen an increase in volume, but it is pulling in loans that it wouldn’t have a year ago.

Greene says it is clear that “suddenly, there has been a flight to quality, and safety matters. Borrowers understand that if I disappear tomorrow, EagleBank will still be here. And I’m sensing that that is helping us.”

In California, Rabobank, N.A., is the result of a string of mergers, the most recent of which accounts for much of the mortgage growth the bank has seen over 2007. However, some growth has come from recapturing share.

Not that it’s been easy, according to Margaret Bond. “We’ve had to put a lot more effort into generating business,” says Bond. Bond says the bank was a bit ahead of the curve, because it had a line of mortgages it believed suited the market, and didn’t have to rethink and retool. The decline of the mortgage brokers helped.

Even Steven, and happy enough
“Things have been pretty constant for us,” says banker Scott Stafford, president and CEO at Evolve Bank & Trust. “Our highs are more moderate and our lows are more moderate here.” Stafford says the Parkin, Ark., bank, with $92 million-assets, has seen some opportunity as players left the field, but for the most part he’s been trying to keep the bank liquid and playing things conservatively.

Indeed, in much of the “middle” of the country, we found that, thus far, things have been relatively unchanged.

Richard McGinnis, president and CEO, at $70 million-assets Home Federal Savings and Loan Association, Lexington, Neb., says his rural markets didn’t see a runup in housing prices and mortgage broker onslaught.

In some rural areas, the impact of disappearing mortgage brokers hasn’t meant much. “I don’t see it as a tremendous boon for community banks, as we once thought it might be,” says J. Peter Clements, president and CEO of $474.9 million-assets Bank of Southside, Carson, Va. The builders his bank finances tended to be conservative, too, so the bank hasn’t found itself with borrowers stuck with inventories of homes.

In rural Minnesota, Erick Gandrud, president of $93.1 million-assets Eagle Bank, Glenwood, says volume has been steady, as have been home values. Only about two hours south, in Minneapolis, foreclosures have been running high.

In some rural markets, there has been growth, but it is a relative matter. Gary Fox, president and CEO, at Bartow County Bank, Cartersville, Ga., says volume is up 20%, in the wake of the departure of about a dozen mortgage players. But Fox says that that rate translates to between eight to ten mortgages a month at his $381.8 million-assets bank. (Cont’d.)

PMI shifts drive strategy change
Private mortgage insurance providers have been cutting back on what they will cover, and changing the landscape of the business in the process.

In April, for instance, MGIC Investment Corp., Milwaukee, the nation’s leading private mortgage insurer, in the course of announcing a first-quarter loss of $34.4 million, detailed steps it was taking to reverse things. These included significantly changing underwriting guidelines and increasing prices. And Triad Guaranty Insurance Corp., another major player, announced plans in June to stop writing new business. Other firms have their share of troubles.

“Nowadays,” says Ohio lender Howard Boyle, “if there is anything at all unusual in the package, private mortgage insurers don’t want it.”

“They are eliminating a lot of programs, tightening up their guidelines, and raising their fees, because they are the ones out in front,” who take the first risks, notes EagleBank’s Stephen Greene.

An issue of concern to some lenders is when private insurers determine that, for their company, a particular region, town, or zip code has become a “declining market.” Requirements may be more stringent. Some loan types may not be insured at all.

“They’ve targeted us [Virginia] as a declining market, which is so not true,” says TowneBank Mortgage’s Jacqueline Amato. When a market has been tarred with that brush, the rules change. Amato explains that it hurts her operation, for instance, when a lender attempts to do a conventional mortgage with a higher loan-to-value ratio. In a “declining market,” the carriers set a different threshold.

This, and other factors, has led to shifts by institutions towards government-backed mortgage programs.

“The mortgage insurance companies are all struggling, and they have shut down the 100% credit offerings,” says United Bank Mortgage’s Cynthia Lowman. As a result, she says, for such loans, “we’ve had to be very creative, and we’ve turned to state programs.” Michigan offers a state rural development effort that will cover the 10% that private mortgage insurance formerly covered. With that guarantee in place, says Lowman, the company can sell the loans to Fannie and Freddie.

New Englander Chris Dunn of South Shore Savings notes that pending changes in FHA limits will help the agency’s programs better fit the higher cost markets of his area. As a result, he says, his organization has cranked up FHA training.

While lenders are grateful to have such places to bring credits that need help, taking that route takes a toll—literally. Extra processing adds costs. It’s a matter of the sheer volume of extra paperwork that a private deal doesn’t require.

“We are doing a ton of government loans,” explains TowneBank Mortgage’s Amato. “But it takes four times as long to underwrite a government loan than a conventional loan.” BJ

The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj0808/index.php?startid=24