Lender Life

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A Rural Retreat

The growing volume, complexity and costs of mortgage regulation are pushing more rural community banks to rethink home financing

By Howard Schneider

Could it be harder to obtain a home mortgage if you live in a rural community? Some early indications are beginning to say “yes.”

The new federal regulatory requirements for mortgage lenders are prompting one in four community banks serving rural communities to stop originating home loans, according to Creighton University’s April 2014 Rural Mainstreet Index. An additional 10 percent of community banks reported that they were planning to get out of residential mortgage lending altogether.

More than 200 community bank CEOs across 10 Midwestern states responded to the survey, says Ernie Goss, an economics professor at Omaha’s Creighton University who oversees the survey.

Community banks that respond to the monthly survey typically operate in towns with about 1,300 residents, where agriculture and energy production are the main activities, Goss says. But he and Ron Haynie, ICBA’s senior vice president of mortgage finance policy, point out that no community can thrive unless credit is available for a wide range of economic activity, particularly home buying.

Most smaller community banks “don’t have the luxury of hiring another person” to handle the growing compliance effort necessary to originate home loans, Goss observes, a point ICBA has made to Washington regulators and lawmakers over and over again.

David Steffensmeier, chairman and president of First Community Bank in Beemer, Neb., finds it frustrating that his $135 million-asset community bank needs one loan officer and two compliance staffers to process mortgage applications for its customers. “You’re trying to serve the community and make loans that customers want,” he says, “but you’re stymied by the regulators.”

First Community Bank operates with three offices, each in a town with fewer than 800 residents. An active month of originations may produce two home loans for the bank’s loan portfolio, while a third of those loans might be referred to another bank that sells into the secondary market.

Steffensmeier agrees that more community banks serving rural, low-volume lending markets are leaving the mortgage lending business, with the Consumer Financial Protection Bureau rules possibly tipping the scales for those decisions. Nevertheless, after more than four decades in banking, he believes “it’s my duty to serve the communities,” so First Community Bank still plans to continue to provide mortgages as best it can to home buyers in its marketplace.

After more than 40 years First Community Bank has foreclosed only on a half-dozen residential properties related to a mortgage loan it provided. However, home purchases coming across his desk now often “don’t fit the specifications regulators seem to think all home loans should fit into.”

Sitting on the fence

Mortgages remain on the lending menu at First National Bank of Las Animas, says Dale Leighty, the bank’s chairman and CEO. But senior managers and the board of directors at the $300 million-asset Colorado community bank will “look very hard” at profitability and compliance concerns surrounding these products at an upcoming strategic planning session.

First National originates about 10 mortgages each month, both for its own portfolio and for sale into the secondary market.

Leighty can’t point to a single regulation that has brought First National to its current point of considering its end in mortgage lending. But the cumulative weight of regulations over the years has gradually increased the cost of providing home purchase loans, and adjusting to the CFPB ability-to-repay regulations is adding further uncertainty to First National’s ability to profitably originate mortgages, he says.

In many rural communities, “there aren’t many sources for home loans,” Leighty adds. “We want to fill that need.” But he adds, “We don’t have enough staff to do mortgages.”

Most smaller community banks “don’t have the luxury of hiring another person” to handle the growing compliance effort necessary to originate home loans.
—Ernie Goss, Creighton University Economics Professor

Other community bankers serving rural areas echo Leighty’s views. Expanding originations so that additional compliance officers can be hired isn’t an option in areas where demand for mortgages is low or sporadic.

“Scads of small banks have already exited” the home loan business, agrees Jim Goetz, chairman and CEO of $175 million-asset Security First Bank of North Dakota, based in Bismarck. Operating in a strong real estate market has helped Security First Bank increase the production of loans it sells to Fannie Mae. Two years ago the volume sold totaled $90 million, and today the mortgage volume it services has risen to $135 million, Goetz reports.

Preparing mortgages both to sell in the secondary market and to hold in portfolio provides additional challenges, he observes. “A different set of credit skills” are required for bankers who originate portfolio loans, he says. “I want a complete balance sheet from the borrower” in those situations, “not just debt payment to income and loan to value ratios.”

Mortgages kept in portfolio are important for borrowers and properties that don’t conform to secondary market guidelines, notes Sarah Getzlaff, Security First Bank’s executive vice president and COO. A home buyer may have recently become self-employed, or his or her residence could be in a community where it’s difficult for appraisers to find comparable sales to support a loan’s underwriting.

“We’re doing the opposite of some folks … we literally couldn’t keep up with the regulatory changes. You must have enough critical mass to pay for management and regulatory oversight.”
—Dirk Meminger, Sauk Valley Bank

“Most banks in Bismarck will not originate loans in the surrounding rural communities because of appraisal issues,” says Getzlaff. “They turn applicants down on the spot, as soon as they hear the name of the community. We are one of a couple banks in Bismarck that are willing to do rural home loans, and the other bank that does also has small town roots. The big banks (even the regional ones) in Bismarck will not do rural home loans.”

Branching out to grow

Sauk Valley Bank, a $290 million-asset community bank based in rural Sterling, Ill., is expanding its home-loan business by opening a mortgage office on the western suburbs of Chicago, says President and CEO Dirk Meminger. “We’re doing the opposite of some folks,” Meminger notes. But “we literally couldn’t keep up with the regulatory changes. You must have enough critical mass to pay for management and regulatory oversight.”

Changing market conditions should assist Sauk Valley Bank at its new mortgage production office, which opened in May. A reduction in total mortgage originations in the industry this year makes it easier to hire experienced lenders with existing professional relationships in the area. The shift from a refinancing to a home purchase mortgage market also favors the “high-touch” community bank approach, Meminger believes.

Besides producing more fee income from mortgage originations sold into the secondary market, the Sauk Valley Bank’s new suburban Chicago branch should develop lending expertise that can help the bank in its primary markets, Meminger says. Federal Housing Administration and state housing development loans are products he hopes “to bring back to the bank’s footprint.”

Community banks with under $100 million in assets are most likely to find their residential mortgage loan volume isn’t adequate to cover residential mortgage compliance costs, says ICBA’s Haynie. Community banks understand that loans with regulations associated with them are less profitable.

Haynie says mortgage regulations that require community banks to change their lending processes or add software to stay compliant encourage those institutions to ask, “Does this business make sense?”


Howard Schneider is a financial writer in California.