By Christina P. O’Neill
When Connecticut Department of Banking Commissioner Howard Pitkin went to his analysts and bank-examination data to verify whether any of the state’s community banks had made subprime loans, he got the answer he was expecting.
None of them had.
“The answer in Connecticut is unequivocally no,” he says. Neither did community banks participate in structured investment vehicles or collateralized mortgage obligations, he says. “I don’t say they don’t work out loans with their customers. But a subprime loan is not their line of business. In nearly all cases, it doesn’t contribute to the health of the community.”
The state’s community banks want their customers to know this, too. Six of them have created an opinion ad that ran in the local media emphasizing that they do not engage in subprime lending, and that they can offer counseling to affected borrowers and refinancing to those who qualify for traditional mortgage programs.
The ad’s wording is uncharacteristically blunt for the banking community. “As community banks, we’re here for the long haul, through good times and bad, not just out for a quick buck.” It underscores what appears to be a shared passion about setting things right.
Chandler Howard, president of Middletown-based Liberty Bank, started the initiative. “I was hearing from people at fundraisers and other events, asking, ‘Why did the banks create this mess?’ I was trying to clarify that community banks didn’t create this problem. We don’t do subprime lending, we don’t provide the financing to the mortgage companies that do subprime loans, we don’t buy the mortgage-backed securities that are a result of issuing the subprime loans – and we’re here.”
The mortgage brokers and the subprime industry are not “here” – that is, their loans don’t stay in the neighborhoods. But for community banks, neighborhoods are their bread and butter. They’re particularly concerned about what’s come to be called “contagion,” in which foreclosed homes depress the value of the properties around them.
“Subprime loans are a bet on the future economy, and where values begin to fall and rates rise, families find they’ve lost the bet. They’re left with a home they can no longer afford,” Pitkin says. “The frequency of early payment defaults in subprime loans is an indication of how lax the underwriting sometimes was.”
Sticking to Their Standards
Connecticut’s local community banks earn their livelihood by knowing their customers, not by making as many loans as possible and then moving on. Dick Taber, president of First County Bank, says his bank sells a very small percentage of the loans it makes. It sells a handful of loans to Fannie Mae that do not meet its stringent credit standards. “But the lion’s share of everything we originate, we keep,” Taber says.
“We’re not interested in making a lot of money on a loan on a short-term basis,” says Bruce Noe, senior vice president at Milford-based The Milford Bank. Instead, the bank seeks long-term relationships with customers. While it does sell some of its mortgages to Fannie Mae and Freddie Mac, Milford retains the loan-servicing on those Fannie and Freddie loans – “borrowers mail the payments to us,” Noe says.
George Hermann, president and CEO of Suffield-based First National Bank, says the bank underwrites its short term adjustable rate mortgages to the full-term rate, not to the first-year rate. “We’ve been doing what we were supposed to be doing,” he says. “We’ve been in business for 144 years and we are continuing to lend.”
Community banks’ underwriting standards have been tested over time and over several real estate cycles, Liberty’s Howard says, “We’ve always adhered to traditional credit and underwriting standards. We verify current income and current value of property, not what you think it will be 10 years from now.”
Helping Whom They Can
But community bankers say it won’t be possible to rush in and rescue every troubled borrower. “Banks can only lend to prime borrowers, otherwise their credit standards are compromised,” says Taber. His bank and others do their best to give advice that may keep troubled borrowers from digging themselves in deeper.
First County Bank often refers borrowers to Consumer Credit Counseling Services (CCCS), a nationwide nonprofit credit counseling organization with three offices in Connecticut. It gets its debt-workout clients onto multi-year plans in which they stop using credit cards and send monthly payments to CCCS. The agency then pays their lenders. Taber says the bank steers troubled borrowers away from so-called “credit repair” shops that, he says, overcharge their clients while giving little or no assistance.
Many subprime mortgage customers have limited options – little income or savings.
“We have to follow sound, prudent underwriting guidelines when trying to assist borrowers experiencing rate and payment shock,” says Noe. Other borrowers don’t qualify because of the nature of their loans. Interest-only loans leave them with no equity and some they owe more than when they started. “And the program they were promised two years ago that they could refinance is no longer available,” he says
“The easiest way to assist these people is if you can do a loan modification for them,” Taber says. “But to do that, you have to find out who is either servicing the loan or owns the loan. And if you can’t, you can’t find the decision-maker, and now you have a problem.”
Pitkin concurs. “I can tell you that the homeowners who cannot be helped are most likely the ones with upside-down mortgages,” he says. “That position in the current market is probably irreversible in the near future and will most likely not reverse in time for them to refinance into a more favorable credit position.” Those who still have equity in their homes are the ones eligible for bank help, he says.
Making a Federal Case
Pitkin takes U.S. Comptroller of the Currency John Dugan to task for, as he describes it, saying the subprime problem is a state issue and not a national bank problem. “He’s wrong to have said that, when you consider the national banks gave subprime lenders warehouse lines of credit and purchased collateralized pools of loans that supported, financed and allowed the subprime industry to grow. In fact, national banks had operating subsidiaries that engaged in subprime lending and these are the same companies that state banking regulators were prohibited from examining by the Supreme Court in the Watters v. Wachovia decision on pre-emption of state authority. Would we have found the problem? Maybe, maybe not and we’ll never know.”
As for the comptroller and the national banks, Pitkin says, “I have the highest respect for the national banking system as well as the comptroller, but you can’t lay the blame solely on state authorities, as the comptroller tried to do.”
In statements to the press and in public testimony, Pitkin has emphasized repeatedly that the subprime crisis has grown from an economic to a social problem and that the federal government should play a role in cleaning up the mess created by an unregulated, non-bank mortgage system. “The states can all do their part, but the only governmental body that has the girth to address it is the federal government.” He credits FDIC Chair Sheila Bair for her recommendation to markets and to Congress: “Mark the loans down, fix the rate, and let’s get on with it,” Pitkin paraphrases. “It’s not often that you hear such a prescription of truth from Washington.”
Ryan Barry, D-Manchester, the House Co-Chair of the Banks Committee, has a similar position. “This issue is a priority this legislative session. We’ve got to help those people who have been victimized, especially in the urban areas where there appears to be more abuses in subprime lending. We want to create some kind of a safety net for those people who were victimized because there was a lack of regulation in the subprime lending arena. We also, however, must be mindful not to react to the extent that it makes it more difficult for people to get home mortgages.”
Sen. Robert Duff, D-Norwalk, the Senate Co-Chair of the Banks Committee, has his own perspective. “In the S&L [savings and loan] bailout, the feds had no problem bailing out very wealthy people,” he says. Now, he indicates, let’s see the same help for the working poor. “We’re not going to hold our breath waiting for federal help. We should look to state agencies and partner with the Fed,” he says.
Pick Up the Phone
The borrowers whom banks can help are those who have not yet had a mortgage reset and who don’t know what they’ll do when it comes, Liberty’s Howard says. Some of them got into subprime loans believing they couldn’t qualify for traditional loans and may not be aware that a community bank can help. Though some may have spotty credit, they may qualify for a fixed-rate loan, he says, “the kind of loan they should have been put in, in the first place.”
Pitkin says the best thing community banks can do is what they’ve always done – providing credit counseling and support for housing advocacy associations. He commends the officers and employees of the state’s community banks for their efforts to support legislation such as the Community Reinvestment Act and organizations that create housing for all income groups.
Last April, Gov. M. Jodi Rell commissioned a Task Force on Subprime Lending. Its job was to find out what impact this problem would have on Connecticut citizens. “Once we finished our report and met with the governor, she told us to go back and figure out how to help our citizens,” Pitkin says. “The governor deserves a lot of credit for coming up with the successful CT Families Program that dedicated $50 million to help people affected by a problem with a subprime loan. Also, it was the governor’s idea to have us set up a foreclosure hotline for people to call and since August we’ve gotten 2,300 calls. We try to connect them with sources in the community that might help.”
“The last thing mortgage holders want to do is foreclose,” Howard says. Instead of taking their home, the bank will likely restructure their debt in a way in which they can get caught up over time. “The message to anyone who is in trouble or sees they will be in trouble is to pick up the telephone and go in and see your banker.”
Christina P. O’Neill is editor of custom publications for The Warren Group.