April 7, 2008
On the bright side | Maine banks, largely unscathed by the subprime fallout, reclaim the mortgage market
By Douglas Rooks
Maine bankers are taking a rueful view of the subprime lending crisis. The crash of high-flying investment firms like Bear Stearns confirms the view many of them had all along: Too much credit was being extended to too many borrowers with insufficient ability to repay.
"It could be frustrating at times, in the heyday of the subprime markets," said Andrew Silsby, senior vice president at Augusta-based Kennebec Savings Bank and a former loan officer. "We'd put on the table what we thought was a very attractive deal, only to have the customer walk away because they thought they could do better at the mortgage company down the street."
There's little question that the recent proliferation of mortgage companies even in relatively conservative markets like Maine put a crimp in banks' residential property lending, traditionally a bread-and-butter item in local banks' portfolios. Only since the crash of the subprime market have banks nationwide started to gain a larger share of the new mortgage and refinancing markets. In the fourth quarter of 2007, banks regulated by the U.S. Office of Thrift Supervision wrote 31% of new mortgages, nearly double the rate just one year earlier.
And the subprime fallout continues. The Federal Reserve recently sponsored a $200 billion exchange of bad debt for treasury securities, and followed that with a $30 billion line of credit to finance the Bear Stearns sale to JP Morgan Chase. But that might not be enough to ward off recession, say economists like New York Times columnist Paul Krugman.
Maine banks, meanwhile, are anxious to separate themselves from subprime lenders and to remind the public that they remain solid institutions, thanks in part to regulations that require them to offer more traditional home loans. While statewide figures are not available on the extent to which Maine banks have saved thanks to their subprime avoidance, many banks Mainebiz spoke with noted year-over-year increases in net income and assets they believe are thanks in part to staying out of subprime.
Lloyd LaFountain, Maine's bank superintendent, recently told the Kennebec Journal, "I have no sense that [Maine banks] are going to be adversely affected by what's happening on Wall Street."
Katahdin Trust Company is one Maine bank that is riding high despite economic woes. The bank recently announced record assets and earnings in 2007, and President Jon Prescott said he "does not see any significant problems" from mortgage lending, distinguishing the Aroostook County bank from "current market conditions that have many banks, particularly large banks, suffering from write-downs in their mortgage portfolios." Katahdin's net income of $4.2 million was up 3.3% over the previous year, while assets grew 8.9%, to $428.2 million.
"We never strayed into the exotic offerings," Prescott said in an interview with Mainebiz. "Those aren't the kind of risks we felt were prudent."
Ducking the boom
As regulated institutions, Maine community banks were unlikely participants in the subprime mortgage boom. As the name implies, subprime mortgages are made chiefly to borrowers who don't fit the credit-worthy "prime" standards banks are required to use. So, despite temptations to cash in on a booming market and attract customers from mortgage companies, many of which sprang up almost overnight, Maine banks generally stayed out.
Jim Eberle, vice president of public relations for the American Bankers Association in Washington, D.C., said that's true of community banks nationwide. "If banks did make any subprime loans, it was with full underwriting. It was always the intent that these loans would be repaid."
That didn't always seem to be true of some players in the subprime market. The lightly regulated mortgage industry seemed to relish coming up with new and ever-riskier strategies to keep things going. Silsby at Kennebec Savings notes that the "no doc" loan became increasingly common ˆ that is, borrowers were not required to prove their income, so their income became pretty much anything they were willing to claim. "No bank would make a loan under those circumstances," he said. "We intend to live with the loans ourselves" ˆ Kennebec Savings does not sell mortgages on the secondary market ˆ "so we want to make sure the borrower is a long-term customer."
Kennebec Savings, like Katahdin Trust, also continues to grow. Its assets increased 2% in 2007 to $619 million, while pre-tax income also rose 2%. And the bank's real estate loans grew at an even faster clip ˆ up 5.5% for the year.
Other subprime lending tactics that have been criticized of late are short-term "teaser" rates which last for two years or less, then balloon sharply upward ˆ a feature that triggered a rash of foreclosures even in Maine. Bankers are quick to point out, though, that their foreclosure rates haven't budged, and remained below 1% through the end of 2007.
Before the bubble burst, it might have appeared that Maine banks were "too conservative," said Chris Pinkham, president of the Maine Association of Community Banks. Just 20 years ago, banks and the former savings and loans wrote three quarters of Maine mortgages. At the peak of the subprime boom, banks' share of loans decreased to 25%, he said. Now, banks are making up for lost time. He said a 5% increase in bank mortgage lending was likely this year, despite the slack market.
The shift away from banks, Pinkham explained, was due largely to the resale of mortgages in the secondary market. While he believes this isn't necessarily a bad thing in a capital-poor state that needs access to credit, the quality of the subprime packages declined. "The investment houses decided they could package the good, bad and the ugly, and if they had enough good paper, they'd be okay," he said. "We now know differently."
June Parent, senior vice president at Camden National Bank, said it was frustrating when a customer decided her bank's offer wasn't attractive enough. In one recent example, a prospective homeowner returned the next day after walking away from a mortgage company's table. "They had discovered a lot of hidden fees," she said. "Fortunately, they read the disclosure form and didn't sign." Because a house closing was imminent, "we had to work pretty fast, but they got the loan."
Greg Dufour, Camden National president, said the law of supply and demand was one reason house prices took off so rapidly after 2002. "You might have qualified for a $125,000 house before," he explained. "With a subprime deal, you might have thought you could afford $225,000."
Kennebec Savings' Silsby puts the phenomenon this way: "When interest rates go down, home prices go up. And when the rates go up again, that flattens prices."
There's a good deal of uncertainty about where rates will go next. Even though the Federal Reserve has sharply cut short-term rates for banks, long-term mortgage rates have barely budged, remaining in the 6% range. "It may be there will be a rate premium for everything we've been through," Silsby said. "The market has been shaken."
Tightening regulation
When the going was good, banks did make some changes in lending practices to remain competitive, Parent admits. For instance, on some mortgages, Camden National allowed borrowers to put down only 13% of the purchase price, rather than the typical 20%. But there definitely were limits. "We know from experience what our customers can afford in the way of a monthly payment," she said. "We knew it wouldn't work for them to go beyond that."
Overall, Camden National had a less stellar year ˆ assets declined 3.1%, to $1.7 billion, while earnings were flat at $20.3 million for 2007 (though the fourth quarter showed a 12% increase over 2006). Business began picking up in the last half of the year, and a recent merger with Union Trust of Bar Harbor should offer growth possibilities in 2008, Dufour said.
Since the crash, banks have increasingly been seen as credit counselors. "People are coming to us for advice, sometimes when they've been burned," said Tim Nightingale, senior loan officer at Camden National. "They have a little different perspective now."
While all mortgages come with similar disclosure requirements, there can still be a big difference in how borrowers perceive their risks, Kennebec Savings' Silsby observed. "We make sure customers really read the disclosures, and we go over them step by step. That's a big difference from someone who goes right to the bottom line."
Concern about risky mortgages began last year, and has already prompted a "pendulum swing" as Silsby put it, toward stricter regulation.
In fact, said Mark Johnston, Kennebec Savings president, "the initial predatory lending law the Legislature passed last year had some significant problems." Among the list of prohibited practices were some involving loans banks typically make to credit-worthy customers, he said. "They had to amend the bill this year to make sure it was more precisely targeted," he said.
The backlash against subprime excesses has gone so far that Parent at Camden National thinks some credit-worthy borrowers may have been scared off. "At a recent conference, some bankers were concerned that more loans aren't being made," she said. Banks, she said, "have plenty of money to lend" ˆ an observation confirmed by other bankers ˆ "and are trying to be aggressive about getting the word out."
Others see the thinning ranks as more of a market correction. "The real estate market has certainly slowed, in Maine like everywhere else," Silsby said. And current rates don't encourage refinancing either, he added.
Though the subprime shakeout is far from over, there's already a retrospective tinge to some Maine bankers' remarks as they reclaim some of their traditional lending turf from subprime land. Dufour, Camden National's president, said the results of past consumer choices have often been stark. "Those who thought they were getting a better deal are now losing their homes," he said. "We wouldn't be doing anyone a favor by giving a customer a mortgage they couldn't afford."
Kennebec Savings' Silbsy believes he knows just why so many mortgage companies ˆ more than 300, according to filings with the state Office of Consumer Credit Protection ˆ got into the business over the past five years. "The commissions were so high, up to $5,000 per loan," he said. "And Wall Street was just pouring money in. That provides a lot of incentive for misconduct."
In the end, bankers intend to conduct business the way they always have. "We've been at this for 90 years," said Katahdin Trust's Prescott. "We just want to be known as a good, solid bank."
"It could be frustrating at times, in the heyday of the subprime markets," said Andrew Silsby, senior vice president at Augusta-based Kennebec Savings Bank and a former loan officer. "We'd put on the table what we thought was a very attractive deal, only to have the customer walk away because they thought they could do better at the mortgage company down the street."
There's little question that the recent proliferation of mortgage companies even in relatively conservative markets like Maine put a crimp in banks' residential property lending, traditionally a bread-and-butter item in local banks' portfolios. Only since the crash of the subprime market have banks nationwide started to gain a larger share of the new mortgage and refinancing markets. In the fourth quarter of 2007, banks regulated by the U.S. Office of Thrift Supervision wrote 31% of new mortgages, nearly double the rate just one year earlier.
And the subprime fallout continues. The Federal Reserve recently sponsored a $200 billion exchange of bad debt for treasury securities, and followed that with a $30 billion line of credit to finance the Bear Stearns sale to JP Morgan Chase. But that might not be enough to ward off recession, say economists like New York Times columnist Paul Krugman.
Maine banks, meanwhile, are anxious to separate themselves from subprime lenders and to remind the public that they remain solid institutions, thanks in part to regulations that require them to offer more traditional home loans. While statewide figures are not available on the extent to which Maine banks have saved thanks to their subprime avoidance, many banks Mainebiz spoke with noted year-over-year increases in net income and assets they believe are thanks in part to staying out of subprime.
Lloyd LaFountain, Maine's bank superintendent, recently told the Kennebec Journal, "I have no sense that [Maine banks] are going to be adversely affected by what's happening on Wall Street."
Katahdin Trust Company is one Maine bank that is riding high despite economic woes. The bank recently announced record assets and earnings in 2007, and President Jon Prescott said he "does not see any significant problems" from mortgage lending, distinguishing the Aroostook County bank from "current market conditions that have many banks, particularly large banks, suffering from write-downs in their mortgage portfolios." Katahdin's net income of $4.2 million was up 3.3% over the previous year, while assets grew 8.9%, to $428.2 million.
"We never strayed into the exotic offerings," Prescott said in an interview with Mainebiz. "Those aren't the kind of risks we felt were prudent."
Ducking the boom
As regulated institutions, Maine community banks were unlikely participants in the subprime mortgage boom. As the name implies, subprime mortgages are made chiefly to borrowers who don't fit the credit-worthy "prime" standards banks are required to use. So, despite temptations to cash in on a booming market and attract customers from mortgage companies, many of which sprang up almost overnight, Maine banks generally stayed out.
Jim Eberle, vice president of public relations for the American Bankers Association in Washington, D.C., said that's true of community banks nationwide. "If banks did make any subprime loans, it was with full underwriting. It was always the intent that these loans would be repaid."
That didn't always seem to be true of some players in the subprime market. The lightly regulated mortgage industry seemed to relish coming up with new and ever-riskier strategies to keep things going. Silsby at Kennebec Savings notes that the "no doc" loan became increasingly common ˆ that is, borrowers were not required to prove their income, so their income became pretty much anything they were willing to claim. "No bank would make a loan under those circumstances," he said. "We intend to live with the loans ourselves" ˆ Kennebec Savings does not sell mortgages on the secondary market ˆ "so we want to make sure the borrower is a long-term customer."
Kennebec Savings, like Katahdin Trust, also continues to grow. Its assets increased 2% in 2007 to $619 million, while pre-tax income also rose 2%. And the bank's real estate loans grew at an even faster clip ˆ up 5.5% for the year.
Other subprime lending tactics that have been criticized of late are short-term "teaser" rates which last for two years or less, then balloon sharply upward ˆ a feature that triggered a rash of foreclosures even in Maine. Bankers are quick to point out, though, that their foreclosure rates haven't budged, and remained below 1% through the end of 2007.
Before the bubble burst, it might have appeared that Maine banks were "too conservative," said Chris Pinkham, president of the Maine Association of Community Banks. Just 20 years ago, banks and the former savings and loans wrote three quarters of Maine mortgages. At the peak of the subprime boom, banks' share of loans decreased to 25%, he said. Now, banks are making up for lost time. He said a 5% increase in bank mortgage lending was likely this year, despite the slack market.
The shift away from banks, Pinkham explained, was due largely to the resale of mortgages in the secondary market. While he believes this isn't necessarily a bad thing in a capital-poor state that needs access to credit, the quality of the subprime packages declined. "The investment houses decided they could package the good, bad and the ugly, and if they had enough good paper, they'd be okay," he said. "We now know differently."
June Parent, senior vice president at Camden National Bank, said it was frustrating when a customer decided her bank's offer wasn't attractive enough. In one recent example, a prospective homeowner returned the next day after walking away from a mortgage company's table. "They had discovered a lot of hidden fees," she said. "Fortunately, they read the disclosure form and didn't sign." Because a house closing was imminent, "we had to work pretty fast, but they got the loan."
Greg Dufour, Camden National president, said the law of supply and demand was one reason house prices took off so rapidly after 2002. "You might have qualified for a $125,000 house before," he explained. "With a subprime deal, you might have thought you could afford $225,000."
Kennebec Savings' Silsby puts the phenomenon this way: "When interest rates go down, home prices go up. And when the rates go up again, that flattens prices."
There's a good deal of uncertainty about where rates will go next. Even though the Federal Reserve has sharply cut short-term rates for banks, long-term mortgage rates have barely budged, remaining in the 6% range. "It may be there will be a rate premium for everything we've been through," Silsby said. "The market has been shaken."
Tightening regulation
When the going was good, banks did make some changes in lending practices to remain competitive, Parent admits. For instance, on some mortgages, Camden National allowed borrowers to put down only 13% of the purchase price, rather than the typical 20%. But there definitely were limits. "We know from experience what our customers can afford in the way of a monthly payment," she said. "We knew it wouldn't work for them to go beyond that."
Overall, Camden National had a less stellar year ˆ assets declined 3.1%, to $1.7 billion, while earnings were flat at $20.3 million for 2007 (though the fourth quarter showed a 12% increase over 2006). Business began picking up in the last half of the year, and a recent merger with Union Trust of Bar Harbor should offer growth possibilities in 2008, Dufour said.
Since the crash, banks have increasingly been seen as credit counselors. "People are coming to us for advice, sometimes when they've been burned," said Tim Nightingale, senior loan officer at Camden National. "They have a little different perspective now."
While all mortgages come with similar disclosure requirements, there can still be a big difference in how borrowers perceive their risks, Kennebec Savings' Silsby observed. "We make sure customers really read the disclosures, and we go over them step by step. That's a big difference from someone who goes right to the bottom line."
Concern about risky mortgages began last year, and has already prompted a "pendulum swing" as Silsby put it, toward stricter regulation.
In fact, said Mark Johnston, Kennebec Savings president, "the initial predatory lending law the Legislature passed last year had some significant problems." Among the list of prohibited practices were some involving loans banks typically make to credit-worthy customers, he said. "They had to amend the bill this year to make sure it was more precisely targeted," he said.
The backlash against subprime excesses has gone so far that Parent at Camden National thinks some credit-worthy borrowers may have been scared off. "At a recent conference, some bankers were concerned that more loans aren't being made," she said. Banks, she said, "have plenty of money to lend" ˆ an observation confirmed by other bankers ˆ "and are trying to be aggressive about getting the word out."
Others see the thinning ranks as more of a market correction. "The real estate market has certainly slowed, in Maine like everywhere else," Silsby said. And current rates don't encourage refinancing either, he added.
Though the subprime shakeout is far from over, there's already a retrospective tinge to some Maine bankers' remarks as they reclaim some of their traditional lending turf from subprime land. Dufour, Camden National's president, said the results of past consumer choices have often been stark. "Those who thought they were getting a better deal are now losing their homes," he said. "We wouldn't be doing anyone a favor by giving a customer a mortgage they couldn't afford."
Kennebec Savings' Silbsy believes he knows just why so many mortgage companies ˆ more than 300, according to filings with the state Office of Consumer Credit Protection ˆ got into the business over the past five years. "The commissions were so high, up to $5,000 per loan," he said. "And Wall Street was just pouring money in. That provides a lot of incentive for misconduct."
In the end, bankers intend to conduct business the way they always have. "We've been at this for 90 years," said Katahdin Trust's Prescott. "We just want to be known as a good, solid bank."
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