The non-traditionalists

Why some community banks are adding niche home and mortgage loans to their portfolios.

By William Atkinson

Community banks generally find success offering traditional mortgages, but others have bolstered them with a range of specialty and niche home and mortgage loan programs.

One of these is The Peoples Bank Co. in Coldwater, Ohio. The $480 million-asset community bank introduced its Home Buyers Assistance (HBA) program in the late 1990s, according to Jack Hartings, president and CEO, and past ICBA chairman.

“We introduced the program because we sell loans into the secondary market, but when loans have a higher loan-to-value ratio than 80 percent, most programs require private mortgage insurance [PMI] and escrowing taxes and insurance, and we don’t do PMI or escrowing at our bank,” he says. “We wanted to give some of our customers an alternative if they didn’t want to go that route. We hold those customers to a little stricter standard in terms of debt to income, time on job and credit scores.” When the bank introduced the HBA program, it was able to require as little as 5 percent down and finance the remaining 95 percent. “Today, we only do a 90 percent loan,” Hartings says.

The bank does not allow customers to use the program for refinancing. “A customer doesn’t need to be a first-time homebuyer, but they do need to be making a purchase of a home,” Hartings says.

The bank currently has about 125 loans in the program, which has held as much as $10 million over the years, fluctuating as new borrowers come in and others leave after refinancing.

Holding borrowers to higher standards, the bank has found its HBA program to be successful. “While we have had some delinquencies, we have never had a loss or a foreclosure in the HBA program,” Hartings says.

“If a loan touches mortgage lending, we are generally active in it, as long as it makes sense for our local customer base.”
—Brenda Hughes,
First Federal Savings Bank

One challenge with the program relates to the ebb and flow of interest rates. “We need to explain to customers the difference between paying PMI and maybe paying a higher interest rate,” he says. “When they understand this, they realize that, even though they may be paying a little higher interest rate, it turns out to be a lower payment overall and much lower fees than a secondary market loan.”

Turning over a new leaf

Community Bank Owatonna in Owatonna, Minn., with assets of $53 million, recently launched a Renovate and Restore program. It is targeted at investors and contractors who are interested in lower-value properties that need work, such as distressed and neglected properties, foreclosures and even some estate sales and liquidations. “These are properties that are usually selling at substantial discounts,” says Steve Grams, the bank’s executive vice president. “Our goal is to have them improve these properties and thus improve the market values of other homes in those neighborhoods.

The program has been working well, and Community Bank Owatonna has granted several of these loans. “We work with a select group of investors and contractors who do these on a regular basis,” he says. “They have enough experience that they can look at a property, decide if it makes sense for them to buy it, and determine where they need to be on the price, based on how much they are going to put into it.”

This program differs from others like it in that the bank allows the borrower to borrow more against the property than it normally would on a commercial property—up to 90 percent of the total investment.

“We are looking at the final market value,” Grams explains. “Let’s say the purchase price is $70,000 and they are going to put $30,000 into it. We will actually lend up to $90,000 of that $100,000 investment.” The bank completes an appraisal before the borrower buys the property, based on the improvements he or she plans to put into it, so it can determine the final value and make sure it is more than the purchase price plus the improvements. “For example, the final value should probably be $125,000 to $130,000,” he says. In the end, the bank is actually only lending $90,000 on a $125,000-plus home.


Percentage of total project investment Community Bank Owatonna will lend
in its Renovate and Restore program

Grams says lending up to 90 percent allows the investors to have more capital available to purchase additional properties, which keeps the program strong and active.

When the renovated properties come up for sale, they often fit in well with some of the bank’s first-time homebuyer programs. “Since the homes have been remodeled, the first-time buyers, who usually don’t have a lot of assets, don’t have to worry about installing a new roof, furnace, windows, etc.,” Grams says.

Across-the-board lending
While some community banks might offer one or two specialty home and mortgage loan products, First Federal Savings Bank in Twin Falls, Idaho, with assets of more than $606 million, offers a wide variety, including homebuilder construction loans, USDA Rural Development Loans, mortgage loans for self-employed homebuyers, piggyback mortgages and Energy Efficient Mortgages.

“We look at all loan programs that are available and determine when it makes sense for us to offer programs that we can deliver to the secondary market, as well as loans that we might want to put on our books and hold in our portfolio,” says Brenda Hughes, senior vice president, director of mortgage and retail lending for First Federal Savings Bank. The community bank is particularly active in the secondary market, selling many loans directly to Freddie Mac and the the Federal Home Loan Bank. “If a loan touches mortgage lending, we are generally active in it, as long as it makes sense for our local customer base,” she says.

Of course, offering so many programs creates challenges, particularly when it comes to compliance. “For example, our customers often get frustrated when they have to wait so long for appraisals or to sign their closing documents,” Hughes says. “They wonder why they can’t waive these timing requirements.”

“If a loan touches mortgage lending, we are generally active in it, as long as it makes sense for our local customer base.”
—Brenda Hughes,
First Federal Savings Bank

First Federal tries to be proactive. “We let customers know at the point of application what the process is and how long it may take,” she says. The bank also stays in constant communication with customers throughout the process, letting them know when they will be receiving certain documents and what the next step will be.

With so many programs, Hughes emphasizes the importance of having “very seasoned” loan officers. “We have people who know the details of all of the programs,” she says. “You really can’t substitute anything else for this experience.”

Rapid changes to the market and to specific programs make continual training another critical element. “We do a lot of in-house training, as well as external training when it is available and makes sense,” Hughes says.

How will these programs fare in the future? Hughes says it depends primarily on whether the economy holds firm. “Any time the economy shifts, changes tend to occur in program requirements and the overall availability of programs,” she says. “Currently, though, the emphasis that the government is placing on housing lends itself to the continuity of these programs.”

Tiny homes, tricky financing

One day at the Bank of Dudley, a house rolled into the parking lot for the lending team to tour.

“We were very much impressed by the quality,” says Clifton Crews, senior vice president of the Dublin, Ga.-based $215 million-asset bank.

The tiny home was from Hummingbird TINY Housing LLC, which builds 500-square-foot (or smaller) homes featuring full kitchens and baths for an average cost of $50,000. Company owners Denise and Tommy Ryals certify their homes through the National Organization of Alternative Housing (NOAH), a trade association that works to regulate construction quality and safety standards for tiny homes so lenders can establish underwriting equivalence.

The tiny home trend has blossomed among people seeking a minimalist lifestyle and lower housing costs. While HGTV shows off cute kitchens and sleeping lofts, they gloss over the challenges of categorizing and financing tiny homes. Some owners live off the grid, while others try to change local zoning laws to live legally on municipal utilities.

Tumbleweed Tiny House Company in Colorado Springs, Colo., builds on wheels to get its “road-worthy” homes certified by the Recreational Vehicle Industry Association (RVIA). Sources there say a lack of RVIA certification limits financing, insurance, DMV registration and future parking options, so Tumbleweed works with lenders to help customers qualify for RV loans.

Crews says Bank of Dudley is committed to embracing the trend. “For a community bank, we have to adapt, understand what’s going on and try to make this an effective market for us and the customer.”

—Susan Thomas Springer

William Atkinson
is a writer in Illinois.