Throughout the sub-prime mortgage meltdown, community lenders have been able to brandish their loan portfolios and point out they were relatively clean of the kind of toxic sub-prime mortgages that sent financial behemoths into convulsions.
But local community banks and mortgage companies may have a different time bomb on their books: jumbo residential mortgages, a review by Banker & Tradesman reveals.
One defaulted jumbo loan is worth several prime conforming mortgages, and more of those jumbo borrowers are falling victim to layoffs or other economic woes. More well-heeled borrowers are defaulting on their loans, and industry analysts say lenders are going to feel the sting.
“Many lenders that did do jumbos are going to pay the price as some of those loans start going bad,” said David Hamermesh, a research director with Needham-based TowerGroup. Community banks mostly kept such loans on the books instead of selling them, he said, and the Northeast in particular has a large number of large residential loans because of high home values here.
Now, he warns that banks should be taking another look at those borrowers and increasing loan-loss provisions accordingly, to get ready for trouble in the future.
Nationally, all jumbo delinquencies are up about 4 percent from December 2007 to December 2008, according to mortgage researcher LPS Applied Analytics. Massachusetts and Connecticut delinquencies are up about 2.26 percent and 2.05 percent, respectively.
But drill down to the wealthier towns or counties, and those percentages will likely double, said John Carusone, president of the Hartford-based Bank Analysis Center. He’d know: Carusone said he’s been consulting with banks that have been dealing with the fallout of nonperforming jumbo loans for months.
Those loans range – by standard definitions of "jumbo" – from $750,000 and up. A Banker & Tradesman analysis of data from its parent company, The Warren Group, shows regional and community banks have originated hundreds of millions of dollars worth of such loans.
Not Just Where The Rich People Live
Large jumbo portfolios pop up on banks in wealthier towns, such as Brookline Savings, which made $233 million in jumbo loans in Rhode Island, Connecticut and Massachusetts from 2004-2008. Fairfield County Bank made $759 million in jumbo loans during the same five-year period, although most of those loans were originated for sale to the secondary market and few remain on the bank’s books.
But place-name banks associated with more modest home values crop up, too, such as East Boston Savings, which made $181 million in such loans, or Fall River Five Cent Bank, which put up $99 million.
The lending juggernauts are here as well, of course: From 2004 to 2008, Washington Mutual made about $5.6 billion in jumbo loans in Rhode Island, Massachusetts and Connecticut. Citigroup’s many different entities together made almost $3 billion, and JP Morgan Chase had $2.6 billion.
New England is lousy with multi-million dollar homes, and borrowers require hefty mortgages to afford those charming seaside colonials or Fairfield County palaces.
On the community lender level, local bankers say their jumbo loans are holding steady thus far. Belmont Savings Bank has about $101 million in jumbo loans on the books from that five-year period – a typical example from the tri-state area.
Keith Andre, chief lending officer with Belmont Bank, said out of a total lending portfolio of $350 million, only three are 30-days delinquent. So far, so good, he said.
“I talk to my associates [other lenders], and as long as they stuck to their backyard and knew the properties, they’re OK. Those that got a little too aggressive and tried to expand beyond their footprint are not faring as well.”
Andre posits that Boston-area bankers have fared well because local borrowers – while not all immune to layoffs – tend to have good personal reserves, and are distributed over a number of towns.
Trouble In Southern Connecticut
But Fairfield County, Conn., for example, might have a different situation, Andre said. Southern Connecticut has a few densely settled areas of high-end homes, many of which are inhabited by employees – or former employees – of the troubled financial industry.
Carusone, who consults with many Fairfield County-area banks, concurred that local banks have been nailed by the combination of Wall Street layoffs and a concentration of multi-million dollar homes. All it takes is a few jumbo defaults, and suddenly a bank has $30 million in nonperforming loans.
“Certainly these banks got used to a diet of financial equivalent of caviar,” he said, and now they’re trying to form a game plan. That usually involves sitting on the loans until the financial markets improve, selling them off at a discount, maybe charge off a portion of it and try to accelerate a sale.
It’s usually in the best interest of the bank to work with the borrower to try to restructure the loan, Carusone said, rather than foreclose on the property and likely lose out big-time on an attempted sale.
“There are limited alternatives here,” he said.
Still, not everyone sees a crisis: John Greco of Darien Financial says default rates are still relatively low – roughly 5-10 percent for those originated through his institution, which lends primarily to southern New England.
Darien Financial made about $115 million in jumbo loans during the past five years, but it sold off most of its jumbo loan portfolio, he said, so even those defaults aren’t a threat to his books. The trouble doesn’t lie with defaults, he said: it’s still a matter of frozen money markets.
“It’s all about liquidity,” he said.
