Banks Hope to Prosper from Tight Delaware Mortgage Standards

Thanks in large part to the actions taken by the country’s largest banks, Wall Street sailed into smoother waters last week following days of turbulence in the credit markets that sent investors flailing for solid ground.

The Dow ended the week up 2.29 percent on better-than-expected news of new home sales for July.

Economists say it’s too early to tell whether the worst is over, but banks in the Delaware housing market say they’ve weathered the liquidity storm well so far and could even come out ahead.

“It affects different banks differently,” says Steven I. Butler, a banking consultant in Avondale, Pa. “There are a lot of banks that are not affected by this at all… Banks that are heavy in deposits or are cash-rich will benefit.”

Financial titans like Bank of America Corp., Citigroup Inc., and JPMorgan Chase & Co. took a lead in restoring investor confidence by tapping into the Fed’s discount window last week after it lowered the discount rate - the rate the Fed charges on money it loans to banks - in an effort to calm nervous investors.

Bank of America also pumped $2 billion into struggling Countrywide Financial, the nation’s top mortgage company, after it was forced to tap into a $11.5 billion line of credit two weeks ago when funding from Wall Street dried up.

“We thought it was good investment for our shareholders,” said Bank of America spokesman Robert Stickler. “It had an added benefit of being a signal to the marketplace that you could make investments in the mortgage market.”

Some of Delaware’s smaller banks have suddenly found themselves in demand with home buyers after years of being shunned for mortgage lenders that offered better rates.

“With the liquidity issues, they [the mortgage lenders] are having to cut back and sometimes even close,” says Stephen Fowle, chief financial officer at WSFS Bank in Wilmington. “We can stay open for business and we can take advantage of the dislocation.”

Last week, 1,200 people lost their jobs after Lehman Brothers Holdings Inc. closed its subprime lending unit, BNC Mortgage LLC. Since June, more than 50 lenders have gone bust.

In the past week alone, Fowle said, he has seen referrals for mortgages increase, often from buyers with pre-approvals from now defunct mortgage companies like American Home Mortgage. “They’re saying, I want to close and I need help.”

The turmoil stems from a long evolution of the nation’s mortgage markets.

Historically, banks made mortgage loans using the money collected through deposits, and kept those loans forever on their books. But over the past two decades, increasing numbers of mortgage loans were securitized - that is, packaged and sold to investors. Over time, Wall Street invested heavily in mortgage-backed securities, and mortgage companies relied heavily on Wall Street for funding.

The trouble began when mortgage lenders loosened up on lending standards, extending mortgages to borrowers with weak or damaged credit. As long as housing prices increased, securities backed by subprime mortgages were profitable for both mortgage companies and investors.

But when the housing market slowed and foreclosures began piling up, investors realized they may have bought into more risk than they’d realized.

“In theory, securitization spreads all that risk around … so it makes us less vulnerable,” says Jay Bryson, global economist at Wachovia Corp. “What we’re finding out now is everybody feels a little bit of the hurt and they don’t like it … so they’re pulling back on their lending opportunities.”

A recent Federal Reserve survey showed 56.3 percent of banks had tightened up lending standards for subprime mortgages, 40.5 percent had tightened standards for nontraditional mortgages, such as adjustable rate loans, and 14.3 percent had even tightened up standards for borrowers with good credit histories who are looking for traditional, 30-year fixed-rate mortgages.

“There are people who literally would have been approved a year ago or six months ago who we can no longer get approved for a mortgage,” says Ann G. Riley, president of Gilpin Mortgage Co. in Wilmington. “We have advised borrowers as well as real estate agents that if someone was pre-approved six months ago, we need to pre-approve them again - because that product might not be there anymore.”

But the tightening has also given traditional banks an advantage in today’s market.

“Lenders who have a natural funding base like banks do, with deposits, are obviously a more consistent and reliable source of funding,” says Zissimos Frangopoulos, president of Christiana Bank and Trust Co. “The mortgage companies rely on funding from the money markets.”

The market turmoil is also opening up doors for banks that are new to the housing market.

“We see it as an opportunity,” Rocco Abessinio, chairman of Applied Bank, says of the credit crunch.

Historically a subprime credit card issuer, Applied Bank has recently expanded into branch banking, opening a full-service “bank-cum-cafe” in Newark, and planning to open a second such branch in Wilmington in September.

Abessinio hopes the tightening of credit will bring more Delaware mortgage customers through his doors.