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| July 16, 2007 |
By: Polyana da Costa |
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outh Florida banks are being watched more closely than others in the nation after regulators tightened standards on exotic mortgages in response to spiking foreclosures.
“We are one of the epicenters of the housing bubble, so regulators have targeted this area, as in Vegas and California,” said Ken Thomas, a Miami-based banking analyst.
As a result, many South Florida banks have simply cut back on nontraditional loans including payment-option, adjustable-rate mortgages and interest-only loans, he said.
“Banks are proud to say they don’t do nontraditional loans because it’s been painted as a negative,” Thomas said. “The concern is there is a large segment of the population that counts on having access to those loans.”
Banks are required to comply with the Community Reinvestment Act, a 1977 federal law designed to prevent redlining and encourage lenders to help meet the credit needs of low- and moderate-income neighborhoods, which are often home to minorities deemed to be financially risky.
“It can be somewhat confusing for banks,” Thomas said. “For years, the emphasis was on increasing homeownership, which a lot of times was done through alternative loans. Now it’s the opposite as many people have been put in a situation they can’t afford.”
Florida ranked second after California in the number of foreclosure filings in May with more than 20,000 — about three times more than a year before, according to RealtyTrac, an Irvine, Calif., firm that publishes a monthly foreclosure market report.
In South Florida, foreclosure filings have more than doubled since June 2006, according to court filings examined by the Daily Business Review.
Some banks already have tightened underwriting standards and improved consumer disclosure practices on nontraditional loans.
Nationwide, about 45 percent of banks polled in a recent federal survey reported tighter review of nontraditional home mortgage applications.
“A number of these nontraditional loans were referred to as an affordability loan,” said Jay Brinkman, vice president of research and economics at the Mortgage Bankers Association. “I don’t have any numbers to show how much of an impact that has had on CRA. But it will have an impact, not on every bank because some banks deal with their CRA requirements in other ways, but those who heavily relied on nontraditional to meet CRA requirements will have to be creative. For example, some can work with 40-year fixed.”
Federal guidance tightening lending standards on nontraditional mortgages has not had a noticeable effect in South Florida, and the region’s bankers don’t expect the new standards to hurt the volume or quality of CRA loans.
BankUnited’s strategy
BankUnited, the largest community bank based in South Florida with $13.9 billion in assets, ventured deep into payment-option ARMs. More than half of the Coral Gables-based bank’s $11.8 billion loan portfolio is committed to them.
But most of the bank’s borrowers have above-average credit scores and borrowed much more than the loans covered by CRA rules, said Eric Darmanin, senior vice president of mortgage services at BankUnited.
“Our option ARMs are for people who want to be in control of their finances, not for the people who can’t afford a home otherwise,” he said. “CRA is an entirely different product and consumer. They have less of a credit score requirement, but we qualify them at a fixed rate.”
BankUnited offers two CRA-related loan programs, which include borrower education and lower fixed-interest rates and can be done without mortgage insurance, Darmanin said.
The thrift reported a substantial increase in nonperforming assets in the second quarter — 0.53 of a percent compared with 0.33 of a percent in the first quarter and 0.09 of a percent a year before.
But he said the level of nonperforming assets is low compared with the overall portfolio and industry averages.
Up until three months ago, payment-option ARMs made up about 80 percent of mortgage loan production at the bank. That number has been reduced to about 70 percent, Darmanin said.
The reduction was not intentional, he said, blaming it on weaker demand for the nontraditional loan, its negative image and the renewed attraction of fixed rates.
Federal regulators issued guidance for subprime mortgages last week and for nontraditional mortgages late last year to tighten loan terms and underwriting standards and address consumer protection issues.
The regulators’ concerns included climbing loan balances, proliferating second mortgages and reduced borrower documentation.
The latest guidance says banks should be able to readily document income of borrowers and make exceptions for reduced documentation only if there are factors that clearly minimize the need for direct verification of repayment ability.
Darmanin said the changes did not have a major impact on how his bank issues nontraditional loans.
“We found we were complying with the vast majority of the guidance,” he said. “The only changes we had to make were some minor tweaks as far as consumer disclosure and put more of a focus in qualifying borrowers on a fully indexed rate.”
Republic Federal, a small but active home lender, also said tighter standards will not impact its CRA-covered loans.
The Miami-based bank has about $700 million in assets and a $509 million loan portfolio, according to FDIC figures. More than half of the portfolio is in home mortgages, and about 10 percent to 20 percent are interest-only loans.
“Most of our clients who choose the interest-only loans are professionals such as doctors, lawyers, accountants, engineers and people who work on a commission basis and bonuses,” said Walter Cook, chairman and chief executive officer of Republic Federal. “They are for people who like to take advantage of the lower payment and pay larger chunks later.”
About half of the interest-only loans were made to foreign nationals who wanted a second home or vacation home in the U.S.
The bank has $15 million to $20 million in CRA loans, including mortgages and commercial loans for low-income developments.
Federal monitoring
Federal regulators monitor banks for CRA compliance, and CRA ratings are used when reviewing mergers, acquisitions and branch opening.
On average, less than 1 percent of banks receive unsatisfactory evaluations, drawing criticism from advocacy groups about the value of the assessments.
In South Florida, the only bank to receive an unsatisfactory CRA evaluation in recent years was Ocean Bank.
Regulators in April 2006 rated the bank poor for mortgages to low- and moderate-income borrowers and weak for affordable housing loans.
Officials at Miami-based Ocean, primarily a commercial lender, declined comment on the issue.
Home loans represent about $620 million, or 1.4 percent of Ocean’s $4.48 billion loan portfolio, and none are exotic mortgages.
Banks don’t have to rely on mortgages to meet CRA standards, Brinkman noted. Another option is lending to developers of affordable housing.
The vast majority of nontraditional and subprime loans are issued outside the federally regulated banking system.
Most South Florida banks say they don’t issue subprime loans, but federal regulators consider low documentation and unverified income on ARMs a form of subprime lending regardless of the borrower’s credit history.
Mortgage companies, which are regulated by the state, are not required to follow federal guidance, putting banks at a disadvantage, said Yesenia De Armas, assistant vice president and residential lending manager at Miami-based City National Bank of Florida.
“The general consensus among people is if you want a nontraditional loan and you need 100 percent financing, you go to a mortgage company, not a bank,” she said. “People know they have more linear underwriting standards.”
But that’s changing, said De Armas, who was sales director at Great Florida Lending, a Miami-based mortgage company not affiliated with Great Florida Bank, before joining City National in April.
Even though mortgage companies are not directly regulated by federal agencies, most loans they generate are sold to the secondary market, which includes federally regulated institutions, she said.
“Take stated-income loans, for example. If a client stated he made $6,000 per month but he only had $2,000 in his bank account, that was overlooked,” she said. “That doesn’t happen today — at least not as often — not even at a mortgage company. They have to follow investors’ underwriting standards or else they can’t sell the loans.”
De Armas said she worked with about 30 lenders that offered 100 percent financing when she was at Great Florida. In a changing market with tighter standards, she was down to three lenders by the end of last year.
“They are slowly starting to come back,” she said. “It has been hurting their portfolios, especially in South Florida where the majority of people depend on 100 percent financing to own a home.”
In some cases, the region’s banks don’t offer nontraditional mortgages but form alliances with mortgage companies that do.
That’s the case with TotalBank, which focuses primarily on commercial lending and offers nontraditional mortgages including no-income verification and zero-down loans on its Web site.
The loans are offered through Countrywide Home Loans, part of Countrywide Bank, which is regulated by the FDIC.
Outsourcing mortgages
“We wanted to serve our customers that needed a home loan, but it was an area that we didn’t want to develop in-house,” said Lydia A. Fernandez, TotalBank’s executive vice president and chief credit and risk officer. “It is fully disclosed to the customer that Countrywide is issuing them the loan.”
Paul Hancock, a Miami partner in the law firm K&L Gates who specializes in mortgage banking and consumer credit issues, said the practice of outsourcing mortgages is not uncommon, but the guidance should apply to all. “A guidance is a guidance and all lenders, whether federal or state regulated, should pay heed to it,” he said.
When housing values were climbing every year, borrowers, brokers and banks were not too concerned if borrowers were attracted by low introductory teaser rates because of the expectation that stressed owners could sell at a profit. But that expectation is gone, and mortgage defaults and foreclosures are up as ARM rates reset.
“Nontraditional and even subprime loans are not bad, but you have to underwrite those prudently,” said Hancock, who served for nine years as the original director of the Justice Department’s fair lending enforcement program.
He said he has not seen any impact from tighter lending standards on the ability of banks to meet CRA requirements, but he acknowledged there is a legitimate concern about the impact of tighter standards on low- and moderate-income borrowers.
“It is a change from what we’ve seen in the past 15 years when the focus was to loosen underwriting standards so more loans could be made available,” Hancock said. “There is a danger, and we need to avoid swinging too far back the other way so we don’t deny credit to minorities and low- to moderate-income borrowers.”
On the other hand, making loans to people who can’t afford the payments is the same as providing them access to a home and taking it away, he said.
Speculators blamed
Subprime loans fell 10.3 percent to $722 billion in 2006 from a record $805 billion in 2005, according to JPMorgan Chase. The total subprime mortgage market is valued at about $1.3 trillion. Delinquencies tend to peak two to three years after subprime loans are issued.
The Mortgage Bankers Association last month blamed speculators walking away from investment properties in Florida, California, Nevada and Arizona for skewing the national statistics on foreclosure filings.
Banking analyst Thomas, who has done extensive research on CRA issues, warned South Florida bankers to “go with the flow, but be very vigilant of your underwriting, especially with nontraditional loans.”
South Florida banks have long focused on compliance with anti-money laundering requirements of the Bank Secrecy Act, but may have to shift their attention to the lending side.
“There is an increased surveillance in South Florida,” Thomas said. “The same level of concern banks had with BSA must now apply to underwriting, especially of nontraditional.”
In the past four months, two South Florida banks have been hit with federal cease-and-desist orders on lending issues.
Miami-based Intercredit Bank signed an agreement last month with the Office of the Comptroller of the Currency to tighten its lending practices and reduce its “high level of credit risk.”
“The OCC wants us to strengthen the credit administration of our loan portfolio as a whole,” said Miguel Rasco, senior vice president of Intercredit Bank’s domestic division. “That includes more focus on customer documentation and credit files being as complete as possible.”
About 35 percent of the bank’s $248 million loan portfolio consists of residential mortgages: 30-year fixed, ARMs and foreign national loans.
In March, Ocean Bank received an FDIC order addressing loan monitoring and credit risk management issues as well as anti-money laundering rules.
Thomas expects the regulatory focus on lending to continue.
“We may see a disproportional amount of [cease-and-desist] orders here and unlike the past three years when the focus was on BSA, the focus will now be on lending.”
Polyana da Costa can be reached at pdacosta@alm.com or at (305) 347-6657.
Eric Darmanin photo by A.M. Holt
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