Local lenders unaffected by mortgage credit crisis

By Dan Cabot - December 20, 2007

A nationwide trend of failed mortgages is costing some borrowers their homes, driving down real estate values, and even threatening giant banks and the national economy. This week the US Federal Reserve moved to protect unwary borrowers, and the construction industry reported a sharp drop in new home construction. However, according to a press release from the Independent Community Bankers of America (ICBA), the good news for Vineyarders is that its small community banks are largely unaffected by the national credit crunch. ICBA reports, "Community banks remain a stable source of mortgage and small business loans."

Brad Egan, loan officer at the Martha's Vineyard Savings Bank (MVSB), summed up what the other two banks also told The Times: "We're following the same lending practices we've always followed. Our portfolio is not observing the same pressures that people are reading about in the national press."

Fielding Moore, president of the Edgartown National Bank (ENB), told The Times that local banks avoid the risky "creative financing" practices which have caused the national crisis.

Mr. Egan explained in a telephone interview that the so-called "sub-prime" lenders were writing mortgages to borrowers with "sub-prime" credit scores (below 660), offering "teaser rates" which shortly shot up, or making loans for 100 percent of the value of the property. Their policies were so careless, if not unethical, he said, that many of them are no longer doing business.

Mr. Moore commented that unethical lenders, interested only in commissions and closing fees, have placed homeowners in a position where default is certain unless real estate values in their area increase or their income increases, or both. When something goes wrong, such borrowers often lose their homes. If enough loans default, a glut of homes on the market drives down real estate values and hurts builders, and banks that are unable to recoup their investments are themselves at risk.

This is unlikely to occur on Martha's Vineyard, Mr. Moore reports. Vineyard banks don't need to offer unsound deals to borrowers, because they compete at a rate one to one-and-a-half percentage points lower than the big lending companies. More important, because Vineyard banks hold the mortgages in their own portfolios, rather than selling them off-Island, they look for long-term customers and lend more prudently, Mr. Moore explained. "We not only help families get a mortgage loan, but help them get a loan they can afford for the long term. We won't put a family in a home they can't afford to keep," he said.

Jeanne Ogden, loan officer at the Bank of Martha's Vineyard (BMV), a division of Sovereign Bank, told The Times that her bank also holds Vineyard mortgages in a local portfolio, separate from the other Sovereign divisions in New England and the Mid-Atlantic states. "We do that because we service the loans we make, rather than passing them on to a national loan company," she said.

Like the other two Vineyard banks, 100 percent of MVSB loans are held on the Island. None are sold to outside lending companies, according to Mr. Egan.

Ms. Ogden told The Times that all of BMV's loans are safe "type A credit" loans, requiring a credit score of 680 or above, based on income, assets, and borrowing history. While BMV offers (typically short-term) adjustable rate loans, 80 percent are fixed rate loans. In the present local market, fixed rates are comparable to the initial adjustable rates. Many of BMV's clients are owners of second homes who can often afford to put up a large portion of the purchase price. Such loans carry a very low risk for the bank. However, like the other two banks, for specially-qualified first-time homeowners, BMV can makes loans up to 95 percent of the purchase price.

All three Vineyard banks give clients financial planning advice, sometimes starting years before the buyer is ready to look for a home to buy. Ms. Ogden stresses that prospective buyers should get pre-qualified by a bank. "We tell [the first-time home buyers] just what they need to have, what they're going to have to do to be able to handle a mortgage."

Mr. Egan told The Times, "We work hard to grant loans to our neighbors, and we also work hard to know our neighbors," he went on. "We don't want anyone to get a loan they can't repay. That's not only bad for the bank, it's bad for the customer."

According to the web site ForeclosuresMass.com, of 6193 foreclosures started in Massachusetts in the past 60 days, only 16 were in Dukes County, by far the fewest in the state except for Nantucket County (3).