Turning Houses into Homes

Top residential mortgages producers

By Howard Schneider

Community banks specializing in residential mortgage lending are working hard to remain competitive in today’s highly regulated marketplace. Typically these banks are portfolio lenders that can adapt underwriting guidelines and closing procedures in ways other institutions can’t. Such flexibility makes them unique and helps ensure their continued success.

Yet their performance involves more than just offering proprietary products. Lending for the top producers among community bank mortgage lenders isn’t a matter of simply fulfilling underwriting guidelines. Instead, their lending approach is inherent in everything they do and how they treat everyone who comes through their doors.

“A lot of alternatives” are available to help people who are having trouble making their home loan payments, notes Theresa Phalon, chief lending officer and senior vice president of retail banking at The North Country Savings Bank in Canton, N.Y. The bank has $232 million in assets.

“They’re all people we know,” Phalon adds. “We don’t want to turn our backs on them.”

Working with borrowers who are under stress also makes good business sense. Despite having 96 percent of its $853 million in assets in home loans, First Federal Savings and Loan Association of Greene County holds no REO properties, says Chad Moore, vice president-treasurer and head of lending at the Waynesburg, Pa.-based institution.

Consumer preference demands that First Federal Savings feature fixed-rate loans. However, Moore says regulators monitor that exposure, but they also remain aware that as a mutual institution it has no need to pay out stockholder dividends.

Moore says the community bank’s “bread and butter” specialty is an owner-builder home construction loan, whereby the consumer borrowing the funds becomes the general contractor. Typically the land in these cases is owned free and clear, so the loan-to-value ratio is low.

With its distinctive niche product, First Federal Savings finds its main challenge doesn’t come from larger banks. “Our stiffest competition is from other community banks,” says Moore.

But repeat customers, referrals and having large numbers of bank staff involved in the communities in which they live build on First Federal Savings’ reputation to keep bringing in more business.

A singular product also plays a big role at Home Savings Bank of Wapakoneta, says James West, president of the $38 million-asset bank in Wapakoneta, Ohio. A mortgage that amortizes over 30 years but with a 15-year balloon payment is the featured home loan.

West says looking at the bank’s portfolio showed an average loan life of eight or nine years. Yet borrowers prefer a 30-year amortization schedule. Although the mortgage was developed in the 1980s, its parameters still meet consumer needs. “It’s surprising how infrequently we hit that balloon,” West notes. Generally, the bank originates these loans 25 to 50 basis points above market rates, he adds.

Knowing its customers well also allows Home Savings Bank to be prudently flexible with its underwriting. A bankruptcy due to medical issues may be overlooked if other borrower factors are involved, West explains.

Historically low rates fostered by Federal Reserve Board policy make it difficult for portfolio lenders to match secondary market rates on 30-year mortgages, Phalon observes. North Country Savings focuses on providing adjustable rates with initial fixed-rate periods ranging from one to 13 years. The 5-1 ARM is the bank’s most popular, she adds.

One reason for the shorter terms is that four universities are within the bank’s home county. Often students and professors plan on moving within a five-year time frame.

Closing costs also can be minimized when holding loans in portfolio. North Country Savings uses a local attorney’s title certification, rather than requiring title insurance on its loans.

Stretching conventional loan underwriting guidelines allows borrowers who don’t quite meet secondary market standards to obtain financing, agrees George Behr, president and CEO of Arundel Federal Savings Bank, a $472 million-asset community bank in Glen Burnie, Md.

For instance, someone who has an 18 percent down payment but otherwise qualifies for conventional financing may get approved at Arundel Federal Savings. However, Behr still finds the marketplace is “very competitive” for originations now. “We look at rates constantly.”

Originating home loans gives community banks the opportunity to establish and grow more long-term and more profitable customer relationships. Holding mortgages in portfolio and servicing them provides the bank extra revenue streams, while it continually reassures borrowers that the bank is there to answer questions about their loans.

Increased regulation surrounding residential mortgages also allows community banks to develop and market unique portfolio products. Typically, these earn a premium over market rates.

Each community bank’s strategy must be adapted to its specific marketplace. Success is seized not solely through effort or design; it also is worked out by responding to individual circumstances.


Howard Schneider is a writer in Ojai, Calif.