Community bankers bemoan fate of ‘bread and butter’ mortgages
By Adam Van Brimmer
Of the bank’s $9 million worth of mortgages in 2012, the institution repossessed only a handful of properties. And none of the remaining home loans were delinquent as of Dec. 31, according to Federal Deposit Insurance Corp. reports.
Come next January, though, First Bank’s approach to mortgage lending will be frowned upon by the federal government’s Consumer Financial Protection Bureau.
The stance by the new agency, created in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, leaves First Bank’s leadership facing a difficult decision: Scrap what is a highly successful strategy or open the bank up to litigation from borrowers.
The bureau’s new mortgage guidelines were among several topics discussed Wednesday at the seventh annual Georgia Southern Regional Community Bank Symposium.
But for the 100-plus community bankers in the Forest Heights Country Club ballroom, the mortgage changes ostensibly written to curb predatory lending processes caused the most angst.
“Any way you look at it, the CFPB guidelines will require major soul-searching and planning on the part of any bank that utilizes them,” Brad Washburn, an executive with Statesboro-based bank consulting firm Steve H. Powell and Co., told the audience. “It’s the way we’ve always done business. With our customers, they’re used to it. They like it. But it’s going to be harder to do them.”
First Bank of Coastal Georgia’s sin, according to the CFPB, is in being the rare financial institution that keeps every mortgage it originates. The bank does not sell loans to secondary buyers like Fannie Mae or Freddie Mac.
Unlike Fannie and Freddie, First Bank’s viability is tied to interest-rate margins, or the difference between what the bank makes on interest from loans and what it pays in interest on deposits.
Mortgages are long-term loans — 30 years in most cases — and interest rates fluctuate significantly over that period. No bank wants to write a loan today at 3.5 percent knowing the interest it pays to its depositors could be at 5 percent seven years from now.
The community bank solution has long been to write short-term mortgages with long-term principles. These mortgages come with balloon payments and the understanding that, when the balloon comes due at the end of the term, the bank will renew the loan for another term at the current interest rate.
For example, First Bank will write you a three-year balloon mortgage today, with the payments based on a 30-year amortization table at 3.5 percent and the balance due in a balloon payment in March 2016. The month before the big payment hits, though, the bank will write another three-year balloon mortgage at the 30-year interest rate at that time.
Such loans fall outside the limits of a “qualified mortgage” and its limited lender liability protection under the new CFPB guidelines. The rules revolve around an “ability to repay” standard, which at its core means that the borrower has the resources to pay the highest possible payment tied to the loan.
In the case of a short-term balloon loan, where the balance often runs in the six-figures, few borrowers meet the standard. If a bank issues a loan that doesn’t meet the standard and the borrower defaults, then sues claiming the bank misled them in issuing the loan, the bank will be “taking its chances.”
“This is very concerning because banks use in-house mortgages to help customers with a certain need,” The Savannah Bank President Holden Hayes said. “Some mortgage borrowers want to keep their loan with the community bank they got it from, and this rule makes doing that a lot riskier.”
The guideline’s impact is concerning even to Georgia’s chief banking regulator.
“Balloon loans are the bread and butter for all of you,” said Rob Braswell, Georgia Department of Banking and Finance Commissioner. “That’s what your customers want.”
The CFPB’s guidelines go into effect Jan. 10, 2014, and the agency has pledged amendments and exemptions in the meantime. The current “ability to repay” rules apply only to the first five years of a loan term, meaning community banks can still issue balloons on mortgages of 61 months or more.
First Bank’s president, Doyce Mullis Jr., said doing balloon mortgages at a longer term is one of several options the bank’s board will consider.
Powell and Co.’s Washburn said next year could be the dawn of a new type of “risk-tolerant” bank.
“A lot of us will need to remain in the mortgage market to stay viable,” Washburn said. “You try to reasonably meet the spirit of the law and take your chances.”
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