Feds banking on incentive for workout arrangements

If the federal extension afforded Connecticut taxpayers provided palpable relief April 15, residents facing untenable mortgage contracts are unsure what to expect from a perplexing incentive from federal banking regulators.

In mid-April, regulators encouraged banks to work with homeowners who are unable to make mortgage payments, saying institutions would not face regulatory penalties if they pursue reasonable workout arrangements with borrowers.

Examples of workout arrangements might include modifying loan terms, or shifting borrowers from variable-rate loans to a fixed-rate terms.

While Fairfield County has the highest per capita income in the nation, it also has pockets where residents have little spare change. Many residential borrowers face significant payment increases when their adjustable-rate mortgage loans reset in coming months, which has resulted in at least 50 failures of subprime mortgage lenders nationwide.

The Federal Deposit Insurance Corp. and other agencies issued guidance that banks that accommodate homeowners might receive favorable consideration under the Community Reinvestment Act (CRA), which prohibits banks from not offering loans in low-income neighborhoods in their market territories.

No Connecticut bank currently has a CRA rating below “satisfactory” however, according to the Connecticut Department of Banking, the threshold below which banks must undergo burdensome regulatory scrutiny. What”™s more, Bridgeport-based People”™s United Financial Inc. achieved an “outstanding” grade on its most recent CRA examination last June.

Those report cards might minimize the federal missive”™s impact locally; as well as the fact that banks have built-in processes to comply with CRA provisions.

“CRA is part of the fabric of institutions now, so it”™s nothing that lenders get excited about,” said James Ballentine, director of grass-roots and community outreach for the American Bankers Association. “It”™s not like they are throwing a party and saying, ”˜Ooh, CRA credit is coming down the pike.”™”

Still, at least one bank appears to be working to improve its already satisfactory CRA rating. Newtown Savings Bank, which is up for CRA review this quarter, this month expanded its mortgage loan program, adding Federal Housing Administration (FHA) loans that are intended to assist lower-income home buyers with lower down payments and interest rates, and a streamlined process.

Newtown Savings Bank received a “satisfactory” grade on its last CRA review in November 2004, and it need look no farther than competitor Savings Bank of Danbury, which last December was elevated to an outstanding rating.

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Margaret Powers, senior vice president of retail lending at Newtown Savings Bank, said the FHA program opens doors for many local residents who want to live in the area, but did not indicate whether a bid for an outstanding rating played any part in Newtown Savings Bank”™s offering the program.

Meanwhile, while foreclosures are up sharply, the banking industry appears to be on board in addressing the crisis.

On the heels of the federal advisory, three of the largest mortgage lenders in the nation indicated they would attempt to work out risky mortgages in their portfolios. The chief executive officer of Freddie Mac said his company would buy up to $20 billion in mortgages to help debtors dodge default status, while the CEO of Fannie Mae said his company is developing new types of loans to help beleaguered borrowers.

Washington Mutual, which has been undergoing a rapid expansion in Fairfield County, said it would refinance up to $2 billion in subprime mortgages.

Whether smaller banks fall into line will likely be a function of the all-important bottom line, which will also determine the success of how much crunch the CRA carrot provides. Wilton Bank CEO Nicki Brown, the lone local representative on the board of the American Bankers Association, said she is still digesting the guidance and trying to determine its relevance for her bank.

“Quite frankly, there aren”™t too many carrots thrown out because they don”™t have to do so,” Ballentine said.