Island Escapes Mortgage Crisis
Vineyard Bankers Say Mortgages Stay at Home for Most Part; But Telephones Are Ringing From National Meltdown
By JACK SHEA
Your mortgage is safe if you borrowed locally, and credit-worthy customers can obtain a local mortgage as easily as last year, Vineyard bankers said this week.
And with the national mortgage business now on the rocks, here is the good news: Most Island banks don't resell their home mortgages. The stay-at-home policy of local lenders and the mostly blue-chip financial status of mortgage applicants combines to make for a comparatively stable scene on the Island home mortgage front.
"We made a decision a long time ago to keep our mortgages in house for a couple of reasons," said Chris Wells, chief executive officer of the Dukes County Savings Bank. He said many Island mortgages are greater than $417,000, the minimum amount set by bank regulators where the secondary mortgage market comes into play. "Involving a secondary lender requires more appraisals and additional underwriting [by the secondary lender] and we saw no more risk in writing the larger mortgage ourselves as jumbo mortgages rather than going into secondary markets," Mr. Wells said, adding:
"There's a bit of sensationalism around the mortgage business today and the actions of some unscrupulous lenders have affected strong lenders with good lending practices." Ironically, Mr. Wells and other Island bankers report a positive backlash for their business.
"People are now coming to us as a result of bad publicity in the mortgage underwriting business. We're seeing some additional refinancing now that rates have dropped a little bit," Mr. Wells said.
Island bankers say they've seen little presence of subprime lenders on the Island. "This is not their market," said Paul Watts, senior vice president of Bank of Martha's Vineyard. He noted for example that Countrywide Mortgage, a high-profile troubled national mortgage lender now prominently in the news, has only showed up to compete using traditional lending criteria for jumbo mortgages.
Some have mused that perhaps the only risk for Island real estate would occur if vacation home rentals slump.
That risk is minimal according to Mr. Wells. "We underwrite differently if the property requires rental income to meet payments but most people who buy second homes have thought it out pretty carefully before they got here and they have other financial resources to use if that [slump] would occur."
Edgartown National Bank president Fielding Moore agreed. "Most of our second-home customers regard rental income as a bonus," he said.
Mr. Wells said his bank's lending criteria are unchanged and he expects to write between $55 and $70 million in mortgages this year. "More if we can get it," he said. Year to date, the bank has written $40 million in mortgages.
"Our lending criteria are unchanged, they are exactly as they were," Mr. Wells said.
Unraveling the complicated national mortgage crisis shows why stay-at-home mortgaging has maintained relative normalcy compared with failing mortgage companies, tighter criteria and a dramatic shrinking of available mortgage money on the national front.
Real estate is a lendable asset and over the past 20 years a new industry of mortgage resellers with many layers, many largely invisible to the public, has grown and prospered - until the music stopped two months ago.
Subprime resellers sold mortgages they had written to larger financial institutions and money sources as collateral to borrow funds to generate even more mortgages. As a result, a mortgage is often passed through numerous institutions before finding a home, often at a financial institution without real estate in its portfolio.
Homeowners see the effect when they receive a letter with payment instructions from an institution they do not know or with which they have never done business, informing them that the institution is now holding their mortgage,
Each reseller along the way charges a fraction of percentage point of the mortgage before passing it up the financing chain. The system remained intact until subprime mortgages began to sell largely outside traditional mortgage banking. Target customers were homebuyers who do not meet traditional mortgage lending criteria. Mortgage broker resellers developed an arsenal of costly temporary financing devices to qualify buyers for mortgaging, including no down payments, adjustable rate mortgages with high rate options, second mortgages, home equity and personal loans and in some cases, jumbo mortgages. As competition grew, subprime resellers loosened borrowing criteria and increased the amounts that could be borrowed, sometimes in excess of the value of property.
Many of those patchwork loans are now coming due. In recent months, the loan default rate has increased dramatically and larger lending institutions have grown wary. As a result, funding has dried up and criteria tightened, rolling the financial crunch back downhill to resellers, their homeowner customers and to hopeful home buyers.
Mr. Watts, whose bank is a division of Sovereign Bank, said Sovereign concurred with his decision to keep mortgages here and to grant local mortgage-making authority. "Sovereign is a large regional bank. The Island and Nantucket are one of only two Sovereign markets which write and hold mortgages locally," he said, adding: "We write and keep our mortgages here because everyone else does and because Island people want a decision-making banker they can see face to face. If we were on the Cape, it might be a different story."
Like Dukes County Savings, Mr. Watts has virtually no mortgages in arrears. In addition to well-heeled clients, Mr. Watts credits the Island mentality and work ethic. "We have a pretty good cadre of savvy Island people. They work hard and pay their bills. If they need a second job, they get one. They love living here and they'll work hard to continue living here," he said. His bank has a goal of $30 million in new mortgages this year and is pursuing that goal with unchanged lending criteria. He is interviewing for a mortgage lender to replace a retirement in his main office in Vineyard Haven.
The Martha's Vineyard Cooperative Bank, which is due to merge with Dukes County Savings Bank this fall, also keeps its mortgages in-house.
Edgartown National Bank uses both Fannie Mae and Freddie Mac, the two major federally chartered and insured institutions to hold most of its 30-year fixed mortgages in addition to its own portfolio of home mortgages. Mr. Moore echoed the business-as-usual approach.
"We haven't had to tighten lending criteria. Our criteria are the same as they always were. We're continuing to write new mortgages and I'm seeing a lot of our new business is in the adjustable rate mortgages refinancing area," he said.