Robert Lavelle
Assessing market

The subprime mortgage market implosion has opened new opportunities for those lenders still standing, but community banks in the Bay State aren’t exactly rushing to fill the void.

As the subprime lending graveyard continues to fill with the bones of failed mortgage companies, the chance to gain market share in the wake of the turmoil would seem tempting. More national lenders have stepped into Massachusetts bank and credit union territory in recent years and stayed, even after the pool of potential borrowers started contracting in 2005, creating fierce competition among lenders.

But many of those national companies, especially the ones that specialized in subprime or Alt-A loans, have scaled back or gone bankrupt in recent months as skittish Wall Street investors, watching delinquency and default rates rise, have fled and taken the liquidity provided by secondary loan market with them.

“There’s an opportunity for [community banks] to step into the market, because there’s less competition,” said Robert Segal, chief investment officer at J. William Mantz Investment Advisors in Danvers.

Yet the seemingly ready-made market of prospective homebuyers with impaired credit, or those who desperately need to refinance a loan as their adjustable rate resets, isn’t the right one for most local institutions, industry watchers say. The exception are those community institutions partnering with state and local agencies and nonprofits to offer lower-risk, specialized loan products that will help some troubled borrowers.

“We’re undergoing a credit correction right now,” said Jim Jones, founder and president of First Wellesley Consulting, a Wellesley-based bank strategy firm. “People who shouldn’t have gotten loans, did.”

Lenders now are applying stricter underwriting standards, he said, and regulators are more interested in everyone’s lending patterns. “The result is that some loans made in the past won’t be made today.”

“Anytime there is a market correction, you are just not going to get organizations that have historically not participated to jump in during the shakeout,” added Jim Blake, president and chief executive officer of HarborOne Credit Union in Brockton. “They are not getting paid enough for the risk of jumping in or getting tainted with the same brush.”

Blake said he’d be surprised if any Massachusetts credit union has plans to offer subprime loans.

Robert Lavelle, senior vice president for lending at Middlesex Savings Bank, said the $3.4 billion Natick-based mutual doesn’t offer subprime or Alt-A loans and has no plans to do so.

He said Middlesex Savings has largely stayed away from the secondary market, except for its sales of prime, fixed-rate conforming loans to Fannie Mae or Freddie Mac. Because the bank has not suffered any ill effects stemming from the subprime crisis, the institution is in a stronger, more competitive market position moving forward.

While Middlesex Savings does not plan to jump into the subprime mortgage market, Lavelle said community banks will likely keep their options open.

“I think lenders are going to want to see how the market for subprime loans develops,” Lavelle said. “Based on that, they’re going to make a determination on whether they’ll [eventually offer] subprime loans.”

But community banks traditionally have not originated riskier subprime loans, and Lavelle said he does not expect many will do so going forward, even though there may be greater opportunities to do so.

A handful of Massachusetts banks offered subprime loans as recently as last March, according to Jones. Of 60 community banks surveyed by First Wellesley Consulting at a Massachusetts Bankers Association real estate conference in March 2006, five offered subprime products. Forty-three percent of the respondents offered Alt-A loans, which are offered to borrowers with strong credit who may not meet all conforming loan guidelines set by Fannie Mae and Freddie Mac.

‘Conservative’ Approach

Segal said that despite the inherent risks, local banks nevertheless may have an advantage in identifying subprime loan seekers with the ability to sustain homeownership by tapping into a pool of potential borrowers within their own communities. In many cases, he said, the banks already have formed longstanding business relationships with the potential borrower.

“They know their customers, and [can be] confident they can make those payments,” he said. That’s also better for the consumer, since a subprime borrower is “much better off having a local person servicing their loan” should a problem arise, he said.

Massachusetts Bankers Association Federal Legislative and Regulatory Policy Director Jon Skarin agreed that the long-term customer is the most likely candidate for a bank subprime loan these days.

In June, Salem Five Senior Vice President for Sales Kathie Sauter told Banker & Tradesman that the bank had offered “a handful” of subprime loans in the past few years to help customers that qualified get out of option-payment, adjustable-rate mortgages they didn’t understand.

The option-ARM loan is considered by many too risky for all but the most savvy borrowers, since it allows tempting minimum monthly payments that allow negative amortization and can leave a borrower owing more than the original loan amount.

Salem Five sells some loans to secondary market purchasers such as Countrywide and Wells Fargo, Sauter told B&T in June. She and other bank lending officials at Salem Five could not be reached for this article.

South Boston-based Mt. Washington Bank offers subprime loans, but only to borrowers they’re sure will be able to sustain them and stay in their homes, Senior Vice President for Residential Mortgage and Consumer Lending Laura Dorfman said.

She said that, in recent months, companies such as Countrywide and Option One Mortgage Corp. have stopped buying the bank’s loans on the secondary market and Mt. Washington Bank, which used to sell a portion of its subprime loans, now keeps all of them in its own portfolio. Because subprime loans make up a very small percentage of its portfolio, their performance has not affected the bank’s books. However, Mt. Washington recently has raised the interest rate it charges for its subprime loans to compensate for the increased risks.

Citizens Bank does not offer subprime loans but does carry Alt-A products, which make up less than 10 percent of its total mortgage pool, according to spokesman Michael Jones.

The bank has seen no “significant” increase in delinquencies despite the current market turmoil, he said. The bank is not making any changes to its lending criteria because its already “conservative” approach has made that unnecessary, he said.

While Citizens keeps its Alt-A loans in own loan portfolio, it nonetheless will evaluate last week’s offer by Freddie Mac to give experienced lenders a 90-day commitment to buy their new Alt-A loans, including reduced-documentation loans, as long as they are solidly underwritten, Jones said. The offer by Freddie, a government-sponsored enterprise and one of the largest purchasers of prime mortgages on the secondary market, was made as private investors have retreated from Alt-A loan securities.

As the non-prime loan market struggles, opportunities for lenders are increasing in other areas, as well. Jumbo mortgage loans – for amounts greater than the $417,000 maximum Fannie Mae and Freddie Mac will buy – have seen interest rates rise a point and a half, to nearly 8 percent in recent weeks, said Hingham Institution for Savings Vice President Michael Sinclair.

“I think a lot of the credit market is locked up Â… and a lot of the jumbo investors put their prices way up because they’re adjusting for credit risk,” said Sinclair. Sinclair said that Wall Street investors have become wary of any non-conforming loan product, not just subprime loans.

However, Hingham Savings, which keeps all its loans in own portfolio, has only slightly increased its jumbo loan pricing.

“We determine internally what the pricing should be,” Sinclair said. Last week, his bank began offering a 30-year, fixed-rate jumbo loan at a 6.95 annual percentage rate with no points. The bank is able to do that because it is setting its own pricing criteria rather than responding to the dictates of Wall Street investors, Sinclair said. With a number of shorter-term loans on its books, the bank has room to offer longer-term mortgages at attractive rates, he said.

Middlesex Savings and DCU offer jumbo loans at similar rates.

Hingham Savings hasn’t yet seen a huge influx in borrowing because of its new jumbo loan rate, Sinclair said, but that could be because all borrowers these days are “skittish.”

A national Federal Reserve survey of senior mortgage loan officers showed that 20 percent of “nontraditional residential mortgage loan” originators reported weaker demand for all such mortgages last month compared to the prior survey in April, while 44 percent reported weaker demand for subprime products.

Blake predicted that with many large subprime and Alt-A lenders and investors now out of the picture, borrowers seeking those loans are also out of luck, at least through 2008.

“There may be an opportunity for institutions to offer safely underwritten subprime or Alt-A loans one day,” he said. “But for now, most [community-based] lenders would shy away. There’s way too much fallout.”

Jones said banks are likely to focus on conventional, construction and jumbo mortgage lending, and perhaps reverse mortgages, in the next couple of years.

State and federal regulators aren’t finished issuing new rules about mortgage loan products, either, he said, suggesting that it won’t be long before they propose changes to rules governing all types of residential loans, not just subprime.

Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, said that partnerships between banks and non-depository lenders may be formed in the future to help fill the void in the subprime mortgage market. Banks might back such loans through affiliates while imposing more rigorous underwriting standards than those that led to the current wave of loan delinquencies and defaults.