Daniel J. Forte – ‘Valuable purpose’
Although deposits are up 11 percent at Bay State banks, they often are, by nature, a short-term funding source. Reliance on deposits often limits the options banks have when seeking to match funds against longer-term mortgages, such as those with 30-year fixed rates. Given that quandary, banks during the past several years increasingly have come to rely on the Federal Home Loan Bank structure to raise funds that previously would have been drawn from large core deposits.
The FHLB in Boston has viewed the funding of community institutions as part of its mission to further the availability of credit for housing needs. Recently, it has turned its considerable attention to the lack of small multifamily credit available.
FHLB-Boston is involved in a phased rollout of its new Small Projects Processing multifamily mortgage product. The lack of availably funding for multifamily mortgages has been a subject of concern for the last several years, according to David P. Parish, senior vice president of the bank who oversees housing and community investment.
The SPP loans are available to member banks. Customers of the bank can finance up to 85 percent of the property’s value for a multifamily home with at least five units. There are two types of fixed-rate loans available, a 30-year loan with a 30-year amortization and no prepayment for five years or another loan with no prepayment for 10 years.
Applications are sent to the Department of Housing and Urban Development after they are reviewed by the FHLB for eligibility. The loan is endorsed by HUD and the bank closes the loan, which is purchased by FHLB-Boston a short time later if all approvals are obtained. The bank retains servicing rights.
“It came out of a series of investigations and discussions with our members on unfilled market needs. One of the things we became aware of as we talked about this was that, traditionally, it’s been very difficult to finance small multifamily projects,” he said.
Parish’s own experience traveling throughout New England visiting the neighborhoods where the FHLB-Boston was funding affordable housing added to the evidence. “Often, the problems in neighborhoods are related to deterioration of small multifamily buildings,” he said. He determined that affordable housing and small multifamily housing were linked.
‘Selling Point’
Gerard Kusinski, senior vice president at Liberty Bank in Middletown, Conn., participated in the recently completed pilot program and obtained three loans for clients ranging in price from $360,000 to $1 million. Without the program, he wouldn’t have been able to offer the much needed 30-year, fixed-rate mortgages.
“We raise money through deposits, principally. Usually the longest term that we raise – certificates of deposit – is five years. These loans are fixed for 30 years,” said Kusinski, who added that the bank would only give five-year loans if it couldn’t sell them.
But through the SPP project, the FHLB-Boston purchases the loans five to 10 days after it closes the HUD-endorsed loan. The Federal Housing Administration insures the loans. As a result of the quick turnaround to the FHLB, any fees on the loan can be retained by Liberty as earned income instead of spreading the fees out over the life of the mortgage, Kusinski said.
“Then there’s ongoing servicing fees that we receive from the Federal Home Loan Bank to service these loans for them. So really it’s a [great situation] for everybody,” he said. “For the FHLB, it’s another investment vehicle that’s 99 percent insured by the federal government,” said Kusinski.
The customer benefits because the loans are non-recourse. “So, the lender is basically looking only to the real estate for repayment rather than to the real estate and to the personal finances of the people involved, which is a big selling point in the marketplace today,” said Kusinski.
In addition to providing liquidity, Parish said that the program can help member banks preserve lending relationships within the community while tapping into a competitive loan program.
“I think one of the big selling features to it is these are FHA-insured mortgages that have a term of 30 years. So, it’s very different than what’s commonly available in the multifamily market now, which is primarily shorter-term and variable-rate [mortgages],” said Parish.
“FHLB funding is instrumental not only for liquidity but also asset liability matching, as far as matching the terms of their liability, i.e. the advances, with their assets [the mortgages]. So, it does help them quite a bit and serves a very valuable purpose from a management perspective,” said Daniel J. Forte, president of the Massachusetts Bankers Association.
New product development will probably continue at the FHLB, said Parish. “As part of our process, we’re looking at ways that we can effectively support community banks. We certainly do it on the funding side.”
Parish characterized the affordable housing need in New England as “broad and deep,” and he said it has to be met in a number of ways. Part of the answer lies in subsidized programming but the private market needs a boost as well.
“We’ve been talking with FHA recently about broadening this approach into new construction programs … So we see what we’re doing in this SPP as just, potentially, a first step that would get us and our members involved with FHA. Not only in this SPP initiative but ultimately in larger projects and also in new construction,” he said.
