Are your home-loan chances better at a smaller bank?
If your mortgage application can't meet conventional rules, a community bank may have a solution.
Hurricane Ike barreled through Texas in 2008, leaving homes on low-lying Galveston Island sitting in as much as 10 feet of water. When evacuated residents were allowed to come back 10 days later, they found four of Galveston's community banks there ahead of them, ready to loan money to repair or rebuild homes.
"Big megabanks" would not have touched the mess, says Jimmy Rasmussen, president of HomeTown Bank, one of the four local banks. The banks made 90-day loans at the then-low rate of 5%, so homeowners could get cash while waiting for insurance checks to come through.
In the month after the storm, the four banks loaned out $40 million using standard mortgage applications. But lenders did bend the rules in some instances, if they were satisfied that a borrower would repay the loan. That meant occasionally waiving strict requirements on credit scores, loan-to-value requirements or even debt-to-income ratios. (Bing: Calculate your debt-to-income ratio)
"We were looking at homes that were destroyed, or had 7 feet of water in them. If you were going to get them appraised, they were not going to be worth much money," Rasmussen says. "A lot of it was unsecured money to our customers, where we knew their characters and we knew they were going to pay us back."
Borrowers returned nearly 100% of loans from HomeTown Bank in that period.
Community banks take pride in this kind of flexibility and local decision-making. There's at least one in nearly every town — 7,000 of them in the U.S., each with assets from $10 million to $10 billion, according to the Independent Community Bankers of America, a trade group.
Typically, those assets are a lot lower than $10 billion. In Texas, for example, the average community bank has $170 million in assets, says Chris Williston, president and CEO of the Independent Bankers Association of Texas. For comparison, J.P. Morgan Chase, the nation's largest bank, has $2.3 trillion in assets; the next biggest, Bank of America, has $2.1 trillion.
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Smaller banks try to distinguish themselves from the behemoths in two ways: by offering more personal service and by making at least some mortgages outside the standard mold.
With small banks, the emphasis is on relationships, says Noah Wilcox, president of Grand Rapids State Bank in Grand Rapids, Minn., which has $239 million in assets. His great-grandfather bought the bank in 1920. Wilcox says his customers know him by sight and he typically knows their families, their histories, their businesses and their employers.
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As automation takes over many daily transactions, smaller banks offer the prospect of dealing with a human who can conduct conversations, recognize a face and listen to an appeal when a transaction goes awry.
That point is driven home by the story of a determined customer at Wayne Savings Community Bank in Wooster, Ohio. The woman wanted to refinance her home loan but needed reassurance. "Her No. 1 question was, 'Do you sell the servicing?'" recalls Jennifer Frontz, the mortgage loan department manager.
It was an unusually sophisticated question. As Frontz suspected, there was a story behind it. The customer was in a three-month battle with her national lender to have erroneous fees removed from her escrow account. When that failed, she decided to refinance to escape the servicer. She wanted to be sure, this time, that if she ran into a problem, she could turn to someone local who had the authority to help her. She was satisfied to learn that Wayne Savings services all its mortgages, even the ones it sells. She'd never have to talk with a bank representative at a far-away call center.
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Lenders commonly sell the mortgages they write, making their profit from the origination fees. They may separately sell contracts to "service" the mortgages. Servicers send statements and collect payments and late fees from customers.
Sometimes banks do their own servicing, but most often they outsource the job. Frustration with servicers is common. Many have been overwhelmed by the workload from foreclosures.
"Servicers are huge operations that use mathematical models for decision-making. They apply the same criteria to everyone. There's no room for personal judgments," says Douglas Evanoff, vice president at the Federal Reserve Bank of Chicago, where he oversees research into banking and financial institutions.
Big versus small
Community banks are benefiting from public anger over big banks' fee increases and Wall Street excesses. They're picking up new customers at an accelerated pace, according to a survey by J.D. Power and Associates.
After the activist group Move Your Money urged customers to transfer accounts from big banks to community institutions, The Wall Street Journal reported that the four largest U.S. banks lost $59 million in deposits. While that tipped the balance a bit, bear in mind that Bank of America alone had $417 billion in deposits in 2011.
All that aside, a community bank could be an excellent alternative if you are searching for more personal service or for individualized treatment of a difficult mortgage application.
When you apply for a loan from a big bank or mortgage company, you're dealing with a high-volume operation. It's "more of a production process," Evanoff says.
"When loans don't fit the box, they move on to the next deal," Wilcox says.
If an application is in some way unusual — "nonstandard" is the term used — it's likely to be rejected. That's true even if you are a good credit risk and there's a good reason why your application doesn't fit all the acceptable criteria.
That's not to say that your loan officer or mortgage broker won't help you strengthen a weak application, perhaps encouraging you to pay down bills to raise your FICO score or suggesting you make a bigger down payment to lower your loan-to-value ratio. Loan officers and brokers shop among the different big banks' loan programs to find a good fit for you.
Still, your loan application must fit "conforming" mortgage standards so it can be resold and guaranteed by the government. The rules are strict and rigid, and the banks themselves may pile on even more demands.
Community banks, in contrast, have more control over the rules for mortgages they keep in house, or portfolio loans. "We all have our guidelines, but for those of us who keep loans in house, we can make exceptions," Rasmussen says.
Portfolio loans are a haven for borrowers who are a good risk but can’t meet all the standard requirements. Borrowers pay a slightly higher interest rate — typically 0.25% to 0.5% more. Some bigger banks also have portfolio programs, but these loans are "a minuscule percentage" of all mortgages, Evanoff says.
For many community banks, however, portfolio lending might be a good chunk of business. Wilcox's bank, for example, keeps more than 85% of the mortgages it makes on its books. Wayne Savings Community Bank keeps 75%. That includes 25 or 30 "nonconforming" mortgages each year that big banks probably would reject.
One reason good applications often don’t make the grade is that the property itself can't qualify. "There could be very good credit and debt-to-income ratio but the issue is the collateral," Frontz says.
In Wayne County, homes often are on acreage with an unused barn or an outbuilding or two. "They're gentleman farms, that kind of thing," Frontz says. Big banks are likely to reject these loans, she says, perhaps because they're worried the derelict structures are a hazard.
And in Wayne County, a home and business may be side by side on a property — a home with a farm, a woodworking shop or sawmill, for example. When owners of these properties want longer-term residential mortgages instead of shorter-term business loans, Wayne Savings suggests a portfolio loan.
Wayne County is in the middle of Ohio's Amish Country. Amish farmers often reject government-approved home insurance coverage, using an Amish community plan instead. That disqualifies them for a conventional mortgage but not for a portfolio mortgage from Wayne State Bank.
Where in Houston, Tx are these small community banks? I have been turned down on the basis of being disabled by three large banks. I have rented the same condo for 19 years and always paid on time and ahead of time. I need to know where to turn. I want to purchase my own home with privacy and peace and quiet.
As for Chase Bank, I haven't tried them for a mortgage, but have had a credit card with them for several years. When I became disabled, they, because I had bought their credit card protection program, cut my interest rate to 0%. They have been very good to me and I am very grateful to them.
Good to hear someone noticing that "bank" is not a four letter word when used in reference to small community banks, in which I worked for many years. Lately, the media has chanted a "bank bad, credit union good" mantra, which is wrong. I worked for one credit union and would not encourage anyone to bank there - unless you like long lines and numerous account errors.
I am worried that some of the new financial regulations to come might stifle small banks' lending flexibility. The megabanks cause the problems, but Congress passes these one-size-fits-all regulations.
Small banks then drown under the costs of compliance and have no choice but to sell out to megabanks. The result is decreased competition and consumer choice, and the next time the big banks need a bailout (and they will), they'll be even bigger than they are now.
The situation is great for politicians. It appears to voters that they are "getting tough", but delivers their sponsors (megabanks) what they want (small banks to buy) on a silver platter.
A deacon from my church wouldn't even loan me $85000 for a business profiting $80k per year...small bank, thought the relationship and my situation would mean something....NOPE!