choice was easy when he bought his Seattle dream home: Pay less
than 6 percent to locally based HomeStreet Bank, or a percentage
point higher and $3,400 extra in fees to Wells Fargo & Co.
“The differences were so pronounced that there was no
question when it came to the final decision,” Stubbs, 31, who
closed in November on a three-bedroom house in the Beacon Hill
neighborhood, near Seattle’s new light rail line and Amazon.com
Inc.’s headquarters, said in an interview.
Small banks with little or no exposure to the toxic debt
that crippled Wall Street have money to lend as U.S. homebuyers
struggle to find credit. While the largest lenders retrenched in
the third quarter, loan volume for institutions with less than $1
billion in assets rose 6.8 percent, according to Pacific Coast
Bankers’ Bank, a San Francisco-based trade group. Barry James,
chief executive officer of James Investment Research Inc. in
Xenia, Ohio, says that trend will continue.
“There’s some real strength in these smaller institutions
that didn’t get in trouble,” said James, whose $650 million
Golden Rainbow Fund owns community bank shares and has beaten 99
percent of its competitors over the past five years, according to
Bloomberg data. “They are picking up business.”
HomeStreet Bank increased its residential mortgage business
by 13 percent in the third quarter from a year earlier, according
to a Federal Deposit Insurance Corp. filing. Meanwhile the
largest national banks, including New York-based JPMorgan Chase &
Co. and Citigroup Inc. and Charlotte, North Carolina-based Bank
of America Corp., curtailed mortgage lending amid the industry’s
$1 trillion in credit losses and writedowns.
A Local Advantage
“No longer do nationwide lenders or investors want to just
pick up business 3,000 miles away, because they’re so concerned
about risk,” Guy Cecala, publisher of Inside Mortgage Finance, a
Bethesda, Maryland-based newsletter, said in an interview.
“That’s the real advantage a community bank has. They
effectively know everybody in the neighborhood, or all their
customers.”
Stubbs, who works for the Seattle City Light public utility
and has an above-average credit score of 760 in a scale developed
by Fair Isaac Corp., said his first contact with Wells Fargo came
in a phone call with an agent in Anchorage, Alaska. By contrast,
he spoke to a HomeStreet loan officer who lives in Seattle and
had also bought property in the area.
“It seemed that he understood the local housing market and
knew the neighborhood, which is something that isn’t captured in
the standard risk profiling,” said Stubbs, who bought the house
for $340,000 with his girlfriend, a graduate student.
Mortgage Applications
In November, the month Stubbs completed his purchase, U.S.
mortgage applications fell to an eight-year low as housing prices
tumbled. Applications picked up in December, when lower mortgage
rates encouraged homeowners to refinance. The top five lenders
slashed mortgage originations by 50 percent over the course of a
year, according to New York-based analyst Meredith Whitney at
Oppenheimer & Co.
Countrywide Financial Corp. and Washington Mutual Inc. cut
residential lending before they were purchased last year by Bank
of America and JPMorgan, respectively. The same was true for
Wachovia Corp., acquired by San Francisco-based Wells Fargo on
Jan. 1. Even Wells Fargo, which has weathered the housing crisis
better than its competitors, reported a $10 billion drop in
third-quarter mortgage originations from the previous quarter.
JPMorgan originated $28.1 billion in mortgages during the
fourth-quarter, a 30 percent decrease from the previous year’s
period. Home equity originations dropped 83 percent from the
previous year to $1.7 billion in originations.
Shares Surge
When Deborah Parsons refinanced her Topeka, Kansas, home
last year, she opted against Countrywide, her mortgage company
for more than a decade. Instead, Parsons turned to Capitol
Federal Financial, a local bank she sees daily on her drive to
work.
Parsons closed the $80,000 loan in December, and now can
reach a local bank representative near her home, instead of
relying on the toll free number that appeared on her Countrywide
bill.
“Customer service was the biggest part and just knowing
their reputation,” said Parsons, 45, who refinanced so she and
her husband could buy new windows and upgrade their air and
heating systems. “We see their commercials, see them on the
street corners.”
Capitol Federal shares have surged 38 percent in the past
year, the best performance in the 495-company Nasdaq Bank Index,
while Wells Fargo, Citigroup, Bank of America and JPMorgan each
have fallen by at least 40 percent.
‘Aggressive’ Banks
National banks that financed the U.S. housing boom “got
very aggressive,” lowering interest rates for home loans,
offering adjustable-rate products to subprime borrowers and
selling bundled mortgages in the secondary market, said Steve
Brown, chief executive officer of Pacific Coast Bankers’ Bank,
which was formed in 1997 and counts more than 200 community banks
as shareholders across the U.S.
“It got so tight that community banks couldn’t stand in the
space any more,” Brown said. “Now the pendulum is swinging the
other way. A small banker can look a customer in the eye, shake
their hand and know them better. You’re not working with models
and prices set in New York.”
That’s become a familiar story to John Dicus, chief
executive of Capitol Federal. The bank’s market share of single-
family mortgages in Kansas City, about 60 miles from Topeka, fell
to 10 percent in mid-2008 from about 20 percent five years ago,
when competitors offered subprime loans to the riskiest customers
and Alt-A mortgages that didn’t require proof of income, Dicus
said.
No Subprime Backlash
Capitol Federal, with a default rate one-seventh the average
of the top 10 U.S. banks, lost business because it wouldn’t lower
its credit standards. Now it’s benefiting.
Profit for the fiscal year ended Sept. 30 jumped 58 percent
and only a quarter of one percent of loans is delinquent. The
lender’s market share is up to 12 percent and opportunities
continue to arise, Dicus said.
“We haven’t been adversely affected through the subprime
and Alt-A meltdown,” Dicus said in an interview. “The smaller
banks, the ones that have been successful through this, will play
a big part in bringing us out of it.”
Hudson City Bancorp., a Paramus, New Jersey-based home
lender, said Jan. 21 that fourth-quarter profit climbed 60
percent, bolstered by increased mortgage originations. The stock
has dropped 17 percent in the past year, compared with the 66
percent slump in the 24-member KBW Bank Index.
More Growth
“The reduced number of lenders will continue to fuel our
mortgage growth,” said CEO Ronald Hermance, in a statement.
Capitol Federal and Hudson City hold most of their loans
rather than sell them. Banks that sell their mortgages in the
secondary market have been hurt because investors that buy
bundled loans are only purchasing securities backed by the
government. Those accounted for 99 percent of issuances in the
first nine months of 2008, according to newsletter Inside MBS &
ABS.
To reignite lending, the U.S. government has poured more
than $200 billion into banks through the Troubled Asset Relief
Program, a $700 billion fund approved by Congress in October.
Community Bank System Inc. opted not to apply for TARP
because it had plenty of capital, the DeWitt, New York-based
company said in November. Today, the bank said it boosted
consumer mortgage lending by 8.7 percent in the fourth quarter
from a year earlier. The stock has dropped 12 percent in the past
year.
Big Banks
As smaller banks increase lending and add market share, the
biggest institutions aren’t losing their dominance. Citigroup,
JPMorgan, Bank of America and Wells Fargo accounted for two-
thirds of U.S. mortgages last year, said Cecala of Inside
Mortgage Finance.
Companies in the Nasdaq Bank Index had total loan portfolios
of $1 trillion at the end of the third quarter, according to
Bloomberg data. The four biggest lenders had 3.5 times that
amount, led by Bank of America with $1.1 trillion, which included
loans made by Countrywide and Merrill Lynch & Co.
The average market capitalization of banks in the Nasdaq
group is $251 million, while the top four U.S. banks are each
worth an average of $52 billion.
Still, John Koelmel says his small bank in upstate New York,
First Niagara Financial Group Inc., is finding more opportunities
than ever and plans to expand lending in the next two to three
years.
Adding Customers
The shares have jumped 22 percent in the past year and the
lender has added customers including small businesses, real
estate firms and home owners as bigger competitors like HSBC
Holdings Plc and Bank of America scale back in the region, he
said.
“It’s abundantly clear to us that they’re not pulling back
temporarily, they’re retrenching for the longer term,” said
Koelmel, 56, from his company’s headquarters in Lockport, New
York. “That’s created and translated into meaningful
opportunities for us. It continues to open doors for us
everyday.”
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