James Didden’s bank has never sold a mortgage.
Not to Fannie Mae or Freddie Mac. Not as part of a federally insured package. And definitely not to Wall Street.
“We like what we do; we like to follow through,” said Didden, president of National Capital Bank, which has operated in the Capitol Hill neighborhood since 1889.
Although about 90 percent of the mortgages written these days are backed by the federal government — mainly through Fannie, Freddie or the Federal Housing Administration, the other 10 percent are typically loans that are too large for the government programs to handle or ones that the lenders decide to keep on their books for whatever reason. These lenders include community banks like National Capital and credit unions, two types of institutions that have long embraced an old-fashioned, common-sense approach to mortgage lending.
The fact that many of these smaller institutions hold on to the mortgages they make offers some reassurance to borrowers spooked by the mortgage market’s unraveling in recent years. Some of these lenders also avoid computer-generated credit scores and other cookie-cutter requirements imposed on borrowers by the government’s big three. Instead, they take into account a potential borrower’s family history, spending habits and existing relationship with the bank, if there is one.
That’s not to say these banks aren’t tough. They still require hefty down payments and tend to deal only with top-credit borrowers. They also don’t have as much capital as the megabanks and therefore can’t pump out as many loans. But without the constraints of the government’s increasingly strict lending rules, they can afford to be more flexible when it comes to dealing with prospective borrowers.
“Community banks are in a unique position to determine who qualifies,” said Guy Cecala, publisher of Inside Mortgage Finance.
Didden and his brothers followed their father into a profitable family business, National Capital. In the late 1960s, Didden worked in the note department — what would be called loan servicing now. Desktop calculator at hand, he reviewed the monthly payment coupons customers sent in, figuring out and writing down the principal and interest paid.
“I knew the names of every mortgage we had in the bank, because I would have to post those payments once a month,” he said.
Of course, Didden said, everything is automated now. But the bank, which has assets of $334 million, still approaches lending the same way. “We haven’t changed our underwriting procedures in 30 years,” he said. “We’ve always done the same thing. We’ve always considered it to be prudent, basic banking.”
That underwriting doesn’t conform to the rules the federal entities lay down. The differences might seem small, but they can make a loan work for someone who doesn’t exactly fit the federal mold. For instance, National Capital doesn’t rely on FICO credit scores to determine creditworthiness. Instead, it pulls credit reports and the bank’s officers review them. “If there are any delinquencies on it, we talk to you about it,” Didden said.
The bank doesn’t require that borrowers put tax and insurance payments into escrow. “These people are responsible enough on their own to do that,” he said.
And it doesn’t adhere to the maximum dollar amount set for federally backed loans. Right now, mortgages guaranteed by the government cannot exceed $729,750 in the Washington area. That limit is due to drop to $625,500 in the fall. (The ceiling varies geographically.) National Capital writes fixed-rate loans for up to $600,000. Above that, it offers only adjustable-rate loans.
In that sense, National Capital is an outlier. Probably 99 percent of loans that lenders keep in their portfolios are “jumbos” — meaning they exceed the limits set by the government, said Cecala, of Inside Mortgage Finance.
Jumbos had made up 4.5 to 5 percent of the market since 2007-08. But in the first quarter of this year, they rose to 8 percent, Cecala said. In large part, that’s because it makes sense for people who already have jumbo loans to refinance now that interest rates are low.
The megabanks have a big presence in jumbos. But smaller institutions have carved out niches by writing jumbo loans. “They’re not going to compete with Fannie, Freddie and FHA. Those are commodity markets still,” Cecala said. “However, the credit crisis has been very good for community banks. It has allowed them to step in and fill the credit void, and they’re putting lots of profitable assets on the books.”
For instance, Bridgehampton National Bank, which specializes in lending on the pricey eastern end of Long Island, will evaluate the specific house and neighborhood when considering a mortgage, said Kevin Santacroce, the chief lending officer. The bank’s mortgage committee weighs things such as how much income a beach rental brings in. In a market where house sizes and styles vary so much that it’s tough to find closely matched comparable sales, committee members know the Hamptons neighborhoods where values should hold up and those where they probably won’t. “We look at each case on an individual basis,” he said.
Loans aimed at some other niches also stay in lender portfolios. Alexandria-based Pentagon Federal Credit aggressively markets its 5-5 adjustable-rate loan to its core military membership. The interest rate on those loans is fixed for five years, adjusts by no more than 2 percentage points, and then remains fixed for another five years.
Military families tend to move frequently, said James Schenck, executive vice president at PenFed. That can make an adjustable-rate loan more attractive to them than a higher-interest fixed-rate loan. ARMs account for about 80 percent of the company’s mortgage volume, which this year will total more than $3 billion.
Although keeping some loans in portfolio is profitable for lenders, they also don’t have much choice. Investors have lost their appetite for loans that are not backed by the federal government and demand has dried up since 2008. Only two private-label bond offerings of new mortgages have hit the market since the start of the credit crisis, both of them packages of high-quality jumbo loans put together by Redwood Trust of California.
Without cash flow from investors, lenders like National Capital can only lend the capital they have — money from depositors — and they have to be particularly careful with it.
Right now, Didden said, his bank is writing mortgages only for existing customers, although that is not always the case. No matter what kind of loan is involved, the down payment is at least 20 percent. Rates aren’t the lowest in town, Didden said, but they are set to be competitive.
Prudence requires making sure that the bank is not carrying too many low-interest fixed-rate mortgages. If interest rates shoot up, then National Capital loses money on every one of the below-market loans it holds.
And Didden hasn’t shut the door on selling loans in the future, if that’s what’s needed for a healthy balance sheet.
That’s all right with Stan Soloway, a longtime Capitol Hill resident who has a mortgage with National Capital as well as his deposit accounts. The fact that the bank holds on to its loans is not the reason Soloway is a loyal customer, he said. Rather, it’s the personal attention the small bank provides, he said.
When Soloway’s family moved within the neighborhood about six months ago, he shopped around among lenders a bit and decided that National Capital’s rates were competitive. “We’ve just found dealing with them to be very easy,” said Soloway, who took out his previous mortgage there.
Didden said depositors routinely tell him that they choose to put money in his bank because it’s family-controlled, conservative and consistently rated safe. “It affects borrowers the same way,” he said. “They don’t want to deal with an organization they don’t feel they can trust.”