The heads of several community banks say the subprime meltdown has strengthened their position, even as they have experienced a softening in residential mortgages. The recent decision by the Federal Reserve to cut interest rates by half a percentage point, which sent the stock market soaring, was also welcome news, reducing the banks”™ cost of borrowing.
The CEOs said that while the business of subprime mortgages ”“ which are loans requiring little or no money down to people with poor credit and low-income levels ”“ had been a tempting one, given the additional business and higher fees they would have made on the loans, their banks had avoided it.
“We have steady underwriting standards through good times and challenging times,” said Gerald Klein Jr., president and CEO at Mahopac National Bank, which is headquartered in Brewster and has offices in Westchester, Putnam and Dutchess counties. “We”™re a portfolio lender and have had to make hard decisions (about who to lend to), versus a mortgage broker, who just makes the loans and sells the risk.”
“The community banks have virtually no exposure,” said Douglas Gulotty, president and CEO of Wilber National Bank, based in Oneonta and with branches in central New York as well as Ulster County and the Capital District. “Mortgage brokers have suffered, and some competition has been eliminated that didn”™t properly price the risk. In the long run it”™ll improve the marketplace for lenders” by evening the playing field and “creating an opportunity for good quality underwritten credit.”
He said the bank”™s mortgage business, which constitutes about a third of its $420 million loan portfolio, had declined until the acquisition of Provantage Funding Corp., a mortgage bank based in Clifton Park, which resulted in positive growth “for the first time in five years.”
Klein predicted that “we will see further credit problems cropping up over the coming months as these (subprime) loans adjust and people try to refinance” in the face of declining housing values. Mahopac, which does more lending in commercial real estate than housing ”“ the split is about 60-40 ”“ is seeing some softening on the residential side, but “on the commercial side we haven”™t seen much of a slowdown at all,” said Klein.
Gulotty described the commercial real estate market as “lumpy,” with Kingston “one of the better markets” ”“ not as strong as Saratoga, but outpacing the southern tier of the state, which remains stagnant. While in recent years investors in commercial real estate “were willing to accept a low capitalization rate” ”“ the amount of income derived from the investment ”“ “because they assumed a high appreciation rate, we”™ve seen more normalized cap rates of late.”
Marjorie Rovereto, president and CEO at Ulster Savings in Kingston, said the bank had also avoided subprime loans, although not all mortgages are plain vanilla. “We work with nonprofits and do a lot of no-down payment mortgages, but the parties have good credit and can pay,” she said.
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While she noted the market for loan and deposit pricing had become very competitive ”“
mainly due to the expansion of credit unions ”“ “we have not changed our methods” for commercial lending.
Rovereto noted that it”™s been difficult in the past few years for the banks to make money because the yield curve ”“ the graphic representation of the difference between short- and long-term interest rates ”“ has remained flat. These nontraditional levels (normally, long-term interest rates would be higher) have resulted in a shrinkage in the spread between the cost of lending money and issuing deposits, which is how banks make money. The recent reduction in interest rates was a big boost. “We”™re starting to get some relief,” she said. “We can start building our margins again.”
Rovereto said that for community banks, “the last great environment was in the early 1990s, when there was lots of refinancing, rates came down from the 9s to the 6s and it was a great mortgage market.”
The situation began to change when “short-term rates started to go up as higher demand for investment in the short end started to affect the market,” Rovereto said. The acceleration of the global economy was another factor, resulting in a tremendous influx of foreign money, which brought long-term rates down since there was little demand for the borrowed funds. Rovereto said she expected the trend to shift as “those global economies mature and people can invest in their own countries.”
Representatives from the larger banks also said stable real estate prices in eastern New York meant there wasn”™t a credit crunch in the area and that the collapse of creative financing methods was resulting in more demand for their business. Michael Keegan, regional president based in Albany at M&T Bank, one of the top 20 banks in the nation, said the bank was very active in working with nonprofits specializing in affordable housing in the Hudson Valley.
M&T Bank “was seeing a lot of volume” as a result of commercial real estate buyers coming back to the bank for traditional financing. Before, they would go to brokers who obtained structured loans put together by investment banks, which would then package the securitized loans and sell them off.
Tom Kelly, spokesperson at Chase home lending, based in Chicago, said Chase”™s mortgage business is up 20 percent from a year ago. However, “we might require a larger down payment or more verification of your income. We might not do a 100 percent loan anymore.” He noted that Chase took a charge in the second quarter on its home equity loan portfolio, reflecting a deepening in defaults due to more home foreclosures.
Rovereto said that while the liquidity of federal funds has been greatly impacted by the subprime crisis, the mortgage-backed market has not been affected so far. However, “if it is seen that mortgages are riskier products, the funding sources are going to start becoming more pricey or nonexistent. We invest in the trading of mortgage-backed securities to offset our risk, so if there”™s a change in that market, we”™d be affected.”
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