Christopher Dunn
Received ‘panic’ calls

In a newly conservative mortgage lending field, lenders who have always been that way are doing just fine. And most have no plans to change their ways, even though subprime mortgage company collapses and Wall Street’s tightening of loan liquidity have opened space in the market.

That’s according to the results of a survey of about 70 Bay State bankers, representing just over 40 institutions, at a recent Massachusetts Bankers Association-sponsored seminar on the topic of “Reclaiming Your Bank’s Mortgage Market Share.”

The real-time survey, created by Jim Jones, owner of First Wellesley Consulting, a Wellesley-based advisor to the financial services industry, polled bankers on types of loans they’re originating and refinancing, and asked about staffing plans and risk management practices.

Many bankers watched in dismay as large, national mortgage lenders rapidly carved out large slices of mortgage market share over the past 10 years. Recent developments in the subprime and Alternative-A loan markets, however, revealed that the meteoric rise of some companies offering riskier loans also put the firms at risk. Local bankers, meanwhile, report their loan originations remain steady or are improving.

“July and August were better than we expected, activity-wise,” said South Shore Savings Bank Chief Operating Officer Christopher Dunn, who presented at the Oct. 12 event. “We were pleased with that Â… I think it’s because some folks are recognizing it’s important who you do business with.”

Presenter Jon C. Auger, a senior vice president for mortgage lending at Middlesex Savings Bank who oversees a $1 billion mortgage lending portfolio, said that lending has remained “very steady in terms of absolute volume” at Middlesex Savings.

“But who’s to say it wouldn’t have been slower otherwise, since the overall market has slowed off,” he added, speculating that the sudden vacuum in the mortgage market may have help keep loan volume up at Middlesex.

Most bankers polled reported their institutions will keep loan originator staffing levels the same in the foreseeable future, but 15 percent said they’ll be adding originators in the near future.

Dunn said when banks’ mortgage market share shifted from approximately 75 percent in the late 1980s to 25 percent more recently, as non-bank and broker-originated loans took their place, the loss was “noticeable.” But Auger said even 2003-2005, banner years for non-bank and subprime lending activity, were “huge” successes at Middlesex Savings, as well.

“There was a big chunk of market share in mortgages that we chose not to participate in,” he said, referring to subprime lending. “If we never participated, we can’t have lost it.”

Bankers don’t seem to want any part of the subprime market, even though it’s large – in 2006, subprime loans made up about 24 percent of mortgage originations nationally, according to a U.S. Government Accountability Office report released this month.

It’s also seemingly theirs for the taking, now that secondary-market securitizers and Wall Street investors who once exhibited voracious appetites for non-conventional loans have stepped away from the table.

But Brookline Bank President and Senior Loan Officer Charles Peck said his bank has “avoided the subprime business” and will continue to do so. Many of the loans made by non-bank providers had terms that his bank simply would never offer, he said.

“We want our portfolio to be secure,” said Peck, whose bank does about 30 percent of its lending in home mortgages. “All we’ve done is continue to finance things that we think make sense.” In today’s market, he said, “we are becoming more popular again.”

Gaining Separation

A significant majority of Bay State bankers (64 percent) said they don’t currently, and have no plans to, purchase loans from mortgage brokers, many of whom once sold their loans to securitizers who pulled funding when the loans started to default.

However, 24 percent of survey respondents said they are buying loans from brokers, and 7 percent plan to start doing so in the future.

“We had a couple of situations where we had a panic call from someone we know – a mortgage broker who couldn’t get funding for someone at a closing [and] we got them funding,” Dunn said.

Many banks (50 percent) are refinancing just one or two option-payment adjustable-rate mortgages monthly, respondents reported on Jones’ survey, with 22 percent saying they refinance between three and 10 such loans per month.

Option ARMs, though not by definition subprime, are considered among the most dangerous types of loans for less sophisticated subprime borrowers because making the minimum payment allowed each month – an attractive option many borrowers chose – may result in negative amortization.

Adjustable-rate subprime loans are blamed for the majority of Massachusetts foreclosures. Both proposed and newly implemented laws aimed at stemming the recent tide of subprime market-originated foreclosures target them specifically. For example, one provision of legislation introduced by Gov. Deval Patrick earlier this year, and passed by the state House of Representatives this month (a Senate hearing is forthcoming), would require mandatory counseling, by a third-party nonprofit agency, for consumers considering a nonprime adjustable-rate loan on an owner-occupied home. Under the legislation, the consumer must affirmatively opt in to the loan after counseling before it can be offered.

Some lenders have pointed out that subprime loans often do succeed, and note that they have allowed people who can’t get a loan from a bank into the wealth-building homeowner mainstream.

Some Massachusetts banks, including Salem Five and Mt. Washington Bank, have offered subprime loans on a limited basis to customers they’re sure can repay them. Mt. Washington used to sell the loans, but now keeps them on its books.

Twenty-five percent of the bankers Jones surveyed said they keep all their loans in-house.

Regulations proposed to address the subprime lending crisis also target non-depository institution lenders disproportionately. Such regulations eventually will have an effect on the kind of loans being offered, Jones suggested. But he said that to date, the shrinking number of loan options available has been a market-driven phenomenon.

“More Realtors today are turning to community banks to finance customers, where they would have previously referred them to a broker,” he said. “This is because they know the deal will get done.”

A lender who can’t sell or fund a loan doesn’t do much good to a Realtor trying to close a sale, he said.

Jones said purchase-money mortgages, rather than refinance loans, and jumbo loans – those greater than the $417,000 limit currently insurable by government guarantors Fannie Mae and Freddie Mac – make up the majority of Massachusetts mortgage loans today. Banks are able to fund such loans today while mortgage lenders – bereft of the support once offered by Wall Street investors – are having more difficulty doing so.

According to Jones’ survey, banks increased fixed-rate lending more than any other kind in the last quarter, with 51 percent reporting increased volume in that area compared to just 7 percent reporting increased origination of adjustable-rate mortgages. Fifteen percent of respondents said they are now issuing more jumbo loans than was the case prior to the advent of the “credit crunch” this summer.

Asked how they plan to capitalize on the opportunities reputation, credit availability and fewer competitors in the marketplace now present to banks, Dunn and Peck said good, old-fashioned advertising is the place to start.

Dunn said South Shore Savings ran ads in local newspapers in August – a slower month when they normally wouldn’t have done so.

“The world has to know you’re in business,” Peck added.

Auger noted that even with the demise of many subprime lenders, there are plenty left. And there are still more competitors to banks for mortgage loans than there were 20 years ago.

What banks need to do, he suggested, is work to erase perceptions that they’re in the same boat with struggling subprime lenders, “because that’s just not the case.”

Fifteen percent of bankers surveyed at the MBA event said their banks will be adding new products to their portfolio, but opinions on whether this is the best way to regain market share are divergent.

“One lender said his bank relies on its portfolio loans,” said Dunn, recalling the MBA event. “But I happen to think that some of the former subprime market may be channeled through [government loan guarantors] Fannie Mae and Freddie Mac. We continue to do business with them.”

Dunn said Federal Housing Administration loans, along with those backed by Fannie Mae and Freddie Mac, are likely to take on heightened importance in Massachusetts, especially if government-imposed lending limits on what they can insure are raised.

Forty percent of bankers said their institutions plan to activate online mortgage application capabilities in 2008, as they look to increase ways potential borrowers can reach them. Just 19 percent said they offer Internet applications today.