Mortgage crisis in North Country a worry

By BRUCE ROWLAND
Contributing Writer

September 08, 2008 06:13 am

— PLATTSBURGH -- The subprime mortgage crisis has struck a glancing blow at the North Country, nudging down home values and requiring that borrowers "get more skin in the game."
If the storm can be weathered, however, the silver lining may be that lenders who engage in solid lending practices may be strengthened and more homeowners will wind up with houses they can comfortably afford.
"I think to some degree, it's helped some of the local community banks here," said Jon Cooper, president and CEO of Champlain National Bank.
Rather than bundling all its mortgages up and selling them to the secondary market, he said, Champlain National keeps about 65 percent of them locally. "We keep a preponderance of mortgages on our balance sheet," he said.
On a national and global level, the subprime mortgage crisis was created when large investors began looking for new opportunities in the late 1990s. Secured mortgages were seen as very safe bet, and a demand developed for large quantities of them bundled together into investment instruments.
To satisfy this need, mortgage writers were pressured to produce more and more of them, and some began lending to buyers with poor credit and inadequate income. It was assumed that housing values would keep going up, so even if these buyers defaulted the home could be foreclosed on and investors would still make their profit.
Complex new loan products were created with low teaser rates that adjusted higher as time went on, and down payments and closing costs were reduced or not required at all as competition grew, and many people wound up with homes they couldn't afford. Credit problems of consumers were ignored, and incomes of buyers sometimes weren't even verified.
The problem was most acute in high-population, fast-growing states such as California, Nevada, Arizona and Florida. In one example from the West Coast, a payment on a half-million-dollar home started at $1,500 a month, but later adjusted upward to $7,000 monthly.
The bubble burst when housing prices stopped increasing and began to retreat, leaving homeowners with a mortgage that was higher than the value of their home. As their interest rates adjusted upward and their payments became unaffordable, many were unable to sell, so they simply defaulted and walked away leaving investors in mortgage-backed securities around the world with billions of dollars in losses.
Cooper said the problem was most acute in high-population areas of heavy overbuilding and speculation where investors would buy a house or condo expecting to "flip it" in a year or two to make a substantial profit.
In the North Country, this hasn't been as much of a problem, Cooper said, although he has seen the market soften in areas with a speculative nature such as the condo and second-home markets around Lake Placid.
Buyers in the North Country, he said, are most concerned about taking on a reliable fixed payment so they know they'll be able to stay in their home for the long run. "I haven't seen delinquencies rise to anything that's really meaningful," Cooper said. "We haven't adjusted our lending standards."
His advice to borrowers is this: Understand your mortgage and pick a payment that's affordable, even when life's financial obstacles arise, especially if you're planning to stay in the home for the long haul. "Be sure you understand the contract," he said, "how rates adjust and who you're working with."
In smaller communities such as the North Country, he said, bankers who want to stay in business can't afford to make unsound loans. "If you get a bad reputation in the North Country, you can't survive," he said, adding that bankers are often high-profile members of the community serving on boards and attending the same churches, shopping in the same stores and going to the same events as their clients.
This isn't to say there hasn't been an impact on the bank. Champlain National does sell some loans on the secondary mortgage market and conditions there have become a lot tighter. "Some of the guidelines we've seen have become a little more conservative," he said. "But it's nothing that's preventing us from doing business in the North Country."
Bob Duquette is the owner of Adirondack Funding Services in Plattsburgh and president-elect of the New York Association of Mortgage Brokers. He has been in the business for more than 30 years and can match customers with loans from more than 30 mortgage companies.
"Like any business, there are cycles you go through," he said, adding that only 20 percent of his business is in the subprime area. As a result, the impact hasn't been severe.
"The impact on my business initially, we saw about 20 percent of our business decline," he said. "However, the conventional side went on fairly well."
Others across the nation haven't been so lucky. "A lot of companies popped up that a majority of their business was in the subprime," he said, explaining that most were in large metropolitan areas, and many of these have been hard hit. "The housing industry in the North Country is much more stable."
In this area, he said, the role of a broker is to match people looking for houses to an available product. This has become more difficult, especially with new federal regulations designed to tighten lending requirements.
It's been a challenge mastering all these new rules. There have been so many changes on what the lending standards are, it's more difficult to fit the potential homeowner into different kinds of financing. "The lending standards have been raised considerably," Duquette said.
A second problem, Duquette said, is that the economy, with the increased cost of food, fuel and other commodities, has put a strain on homeowners trying to keep up with their payments. And, because many of the more creative loans are no longer available, there are fewer financial products available out there now for them to turn to if they need to refinance.
It was late in 2007, he said, that the declining economy and the mortgage crisis combined to form a perfect storm that now has adversely affected mortgage writers, realtors, appraisers, lawyers and has left many thousands of people in the financial community out of work.
"It was like Hurricane Katrina in a way," he said, when the flood waters came in and the dykes started breaking. "This was the effect on a national basis, but mostly in areas of high-priced homes."
This had a ripple effect across the country, but "by the time it gets to the North Country, the ripples are smaller."
A third component of the problem, he said, is because the economy on an overall basis was affected in so many areas, consumer confidence began to suffer. "Potential homebuyers decided to wait and see what happens," Duquette said. "There are a lot of people sitting on the fence waiting for the bottom."
Now, he believes, if things aren't at the bottom, they are very near it. "I know that in our market, values are stabilizing," he said. "I think it all comes down to consumer confidence."
In fact, he said, with an abundance of housing inventory and low interest rates, it's a good time to get back in. He said there are still good financial deals out there, many of the government-backed variety, that offer low down payments, closing-cost assistance and don't require perfect credit.
While not a big fan of government regulation, Duquette does see one plus coming from government legislation designed to help assist the housing market. More education will be required for mortgage originators, which is something the New York Association of Mortgage Brokers has been advocating for, and Duquette is certified to be an instructor.
He said this will ensure more consumer protection, more professionalism in the industry and "more knowledgeable loan originators to give consumers better advice."
Frank Miller, a loan officer at M&T Bank, Mortgage Division in Plattsburgh, has also seen an impact locally. Deals with no down payment or closing costs are no longer available. "It's slowed things down, and a lot of loan programs have disappeared," he said.
While the sub-prime crisis has been less pronounced in the North Country, he said, it probably has had some impact on the real-estate industry. Sub-prime borrowers, those with inadequate income or poor credit, have been taken out of the market leaving a higher inventory of houses.
Miller attributes the current situation to greed on the part of both lenders and borrowers. "People were not doing the right thing for the borrowers," he said. "They were putting people in loans they knew were going to fail." Also, speculators can no longer get a second home for nothing down and flip it at a 10-percent-per-year profit.
He said he also believes regulators were asleep at the switch, and everybody was trying to get their cut. Mortgage-related institutions shouldn't have 20 people on the payroll making $1 million annually as was the case in at least one instance, he said.
By next spring and summer, Miller said, he hopes the pendulum will have swung and consumers will regain the confidence to come back to the market, but on a more solid basis. Now, he said, their 401ks are full of financial stocks that have plummeted, and this is another way the sub-prime crisis has affected working people.
He said the price of petroleum-based building products such as shingles and PCV have put a damper on the new-construction market as well. "The cost of building has gone up tremendously," he said.
But, even in the face of adversity, he added, it doesn't mean buyers should despair. While home prices are not down substantially locally, they are certainly not at their peak and lenders can still be found. "There are still good programs out there," Miller said.
And, if the market does rebound next year, he added, it should be on a more solid foundation. It's just that buyers will then have to have "more skin in the game" in terms of down payments and equity as conditions get back into balance.

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