Community banks meet a need for rural mortgages

Andy Fischer
Andy Fischer, a mortgage loan officer, says Community Bank Mankato is more flexible than online lenders because of its established customer relationships.

With community banks providing the only physical banking locations in nearly one in five U.S. counties, they meet a critical need for mortgage borrowers while also helping to stem rural flight.

By Bridget McCrea

The numbers don’t lie: Community banks provide rural homebuyers with vital access to credit. According to the Brookings Institution, community banks and other financial institutions with fewer than $10 billion in assets originate almost one in three mortgages in rural markets. As the only physical banking locations in almost 20% of U.S. counties, community banks fulfill a pivotal role in bringing relationship banking to many small towns.

While digital platforms can reach markets regardless of geography, what happens when a borrower has a unique financial situation (such as self-employment or past bankruptcy) or needs support with the application, underwriting and approval process? What about a first-time buyer who wants a trusted advisor to talk to about potential challenges? Community banks fill these gaps. “If someone has nontraditional credit, a nontraditional income source or is buying a property that wouldn’t qualify for the secondary lending market, we can be a lot more flexible,” says Andy Fischer, a mortgage loan officer at $330 million-asset Community Bank Mankato in Mankato, Minn.

In other words, if a customer doesn’t fit into a megabank or digital mortgage lender’s “window,” Fischer says, then they won’t qualify for a loan, whether it’s due to a credit situation, income issue or the property type. “We can be a lot more flexible in these areas,” he says, “whereas a large or online bank can really only handle secondary marketing loans.”

Bridging the gap

With nearly 74 million people residing in rural areas of the country, lenders in these markets originate more than 1.2 million mortgages annually. That’s about 18% of the total mortgage market and proof of the important role that community bankers play in these regions.

Brookings reports that the rural mortgage market is just as competitive as urban markets. The top 10 lenders hold a 20.9% market share, and 5,486 lenders make loans in rural areas.

Fischer says Community Bank Mankato does quite a few home loans in the small communities where it has physical locations. Unlike online platforms, Community Bank Mankato has established relationships with its customers, most of which already have deposit accounts with it. And while those established customers must comply with the same credit and debt-to-income criteria that any homebuyer would, the community bank also offers in-house loan products that have more flexible guidelines.

Quick stat

1 in 3

rural mortgages are originated by financial institutions with less than $10 billion in assets

Source: Brookings Institution

“Rules are rules, and they’re set forth by the government,” says Fischer, whose community bank offers a standard mortgage that’s held on its balance sheet, and serviced locally, much like an agricultural or business loan would be.

Similar to the USDA Rural Development Program, Bank of Mankato’s loan can help make financing available to people who might otherwise move to more populated regions. A phenomenon known as “rural flight,” this migration pattern found 35% of rural U.S. counties experiencing significant population loss between 1950 and 2010.

Those counties are now home to 6.2 million residents, a third fewer than in 1950, according to research from the University of New Hampshire. “The fact that we can offer an in-house loan product opens up the options for buyers,” Fischer says, “and helps keep our small, rural communities populated.”

“The fact that we can offer an in-house loan product opens up the options for buyers and helps keep our small, rural communities populated.”
—Andy Fischer, Community Bank Mankato

In Milton, Wis., president and CEO Brendon Wilkinson says $118 million-asset First Community Bank Milton offers a product that most large lenders don’t: a parent co-signer option. With 43% of Americans age 20 to 24 migrating to larger cities, a parent’s co-signature on a mortgage can help make rural homeownership attainable for younger homebuyers.

Brendan Wilkinson
Brendan Wilkinson

“Maybe the buyer has a down payment but needs a little boost,” he says. “Particularly if it’s for the child of one of our customers, we’re going to help them with that.”

In surveying the rural mortgage lending environment, Wilkinson says that 2020 is off to a strong start. “Interest rates are awfully good right now,” he says, noting that ongoing challenges for smaller bankers include the additional layers of compliance associated with mortgage lending. “When it comes to construction disclosures and related documents, it’s more complicated than it used to be.”

Those complications directly affect borrowers, who “show up to closing and kind of roll their eyes at the stack of paper on the desk,” Wilkinson explains. “We’re just following the rules, but customers don’t realize the amount of paperwork involved and probably think it’s overkill.”

In terms of loan velocity, Wilkinson sees substantial opportunity ahead. “Our competition is online, and the credit unions are here in our area,” he says, “but we’re definitely heading in a positive direction this year.”

Fischer says secondary market loans and loans for nonresidential properties have become more difficult to secure since 2008. In rural areas, for example, many properties have grain bins, barns, machine sheds and other outbuildings that are lumped under the income-producing umbrella. That increases the difficulty of getting mortgages for these types of properties. “Since the recession,” he adds, “the secondary market doesn’t really like those types of properties.”

This spells opportunity for institutions like Community Bank Mankato. “We’re a big part of keeping these communities afloat with our agricultural and business lending,” Fischer says. “Many big banks closed their branches in small towns, but we relish the fact that we’re in some of these smaller communities, where we just don’t have much competition anymore.”

Bridget McCrea is writer in Florida.