Local banks step into mortgage market

Matthew Stubbs opted to go with a local bank when he bought his house in Seattle last year. Matthew Stubbs opted to go with a local bank when he bought his house in Seattle last year. (Kevin P. Casey/Bloomberg News)
By Dan Levy and Ari Levy
Bloomberg News / January 25, 2009

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Matthew Stubbs said the mortgage choice was easy when he bought his dream home in Seattle: 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," said Stubbs, who closed in November on a three-bedroom house in the Beacon Hill neighborhood, near Seattle's new light rail line and Inc.'s headquarters.

Small banks with little or no exposure to the toxic debt that crippled Wall Street have money to lend as US 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 trade group. Barry James, chief executive 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 JPMorgan Chase & Co. and Citigroup Inc. and Charlotte, N.C.-based Bank of America Corp., curtailed mortgage lending amid the industry's $1 trillion in credit losses and write-downs.

"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, Md.-based newsletter, said. "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, said his first contact with Wells Fargo came in a phone call with an agent in Anchorage. 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.

National banks that financed the 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 US community banks as shareholders.

"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."

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 US 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 Financial Corp. and Merrill Lynch & Co.

The average market capitalization of banks in the Nasdaq group is $251 million, while the top four US banks are each worth an average of $52 billion.

Still, John Koelmel says his small bank in upstate New York, First Niagara Financial Group, plans to expand lending in the next two to three years.

"It's abundantly clear to us that they're not pulling back temporarily, they're retrenching for the longer term," Koelmel said from his company's headquarters in Lockport, N.Y. "That's created and translated into meaningful opportunities for us. It continues to open doors for us every day."