County calm in the center of the financial stormEDITOR’S NOTE: This is the last of a two-part series on Wisconsin’s banking industry. At a time when the nation is facing a fiscal emergency, Superior and Douglas County appear calm in the center of the storm.
By: Shelley Nelson, Superior Telegram
EDITOR’S NOTE: This is the last of a two-part series on Wisconsin’s banking industry.
At a time when the nation is facing a fiscal emergency, Superior and Douglas County appear calm in the center of the storm.
While unemployment rates all around Douglas County were exploding in February to 10 percent and higher, local industries were announcing the creation of new jobs — everything from manufacturing to telemarketing.
In many cases, local community banks were leading the charge to help entrepreneurs with good business plans create jobs. Institutions like National Bank of Commerce still have the resources to lend because they took sound risks in an era of greed.
“We did not participate in the subprime lending whatsoever,” said Larry Kappes, president of National Bank of Commerce.
Contrary to public opinion, foreclosure isn’t a moneymaker for banks.
It was mortgage brokers who gained whether or not people were successful in paying their loans. Fees to originate the loans were paid to brokers, who were often out of the picture by the time the market started to collapse, said Kurt Bauer, president and CEO of Wisconsin Banks Association. The loans were sold to investors who were then left holding the bag for unpaid debt. At the height of the housing frenzy, some brokers bent the rules, allowing people who couldn’t afford them take out loans they had little hope of repaying.
In some cases, brokers didn’t bother to verify income, said Bruce Thompson, vice president of National Bank of Commerce.
“I want to tell you about the profitability of a foreclosure,” Kappes said. “In the 38 years that I have been in banking, we have come out with more dollars than was necessary to close out the mortgage (once). In other words, we made some dollars on it and you know what we did with it. We gave it back to the people.”
Thompson said typically, the bank recovers 50 percent of the value of the mortgage when a property goes through a foreclosure.
“As far as foreclosure is concerned, we’re not seeing much of it,” said David Stack, president of Superior Savings Bank. “Right now, we have no foreclosed homes on the books. Within the next two months we will have one, and it will be sold.”
Currently, National Bank of Commerce has one foreclosed property and two in foreclosure — “very minute in the grand scheme of things,” Thompson said.
“Our foreclosure rate has probably doubled,” Kappes said. “It went from 1 to 2, to 3 to 4. It’s as simple as that.
A foreclosure is a very unprofitable, unpleasant endeavor, Stack said.
“We take our lumps for that,” Thompson said. “Banks struggle to have customers be proactive when they run into these difficulties … we really can work with them.”
The ads were clear: No down payment — no problem; bad credit — no problem. Today, it’s a problem if you’re looking for a loan.
There are fewer lenders in the state today than there were during the housing boom, according to Bauer. While there were once 16,000 mortgage brokers in the state, fewer than 6,000 remain, he said.
It’s a pitfall community banks avoided by sticking to long-established credit standards and resisting the urge to reach beyond the communities they serve with high-risk loans for a quick profit, Thompson said.
That doesn’t mean FDIC-insured banks are off the hook; they are picking up the tab for failed banks as the Federal Depository Insurance Corporation recapitalizes its fund for backing the nation’s deposits.
Kappes estimates National Bank of Commerce, the state’s 34th largest community bank with total assets of almost $571.9 million, will see an increase in its FDIC insurance premiums in the “mid-six-figure” range, which will affect its ability to lend.
However, creditworthiness is a more critical issue now, and Bauer said the economic downturn has resulted in fewer creditworthy borrowers, both in business and private lending scenarios.
Community banks resisted the urge to make a bigger profit or expand its business by lowering its standards of creditworthiness.
“Those are the ones that come back to bite you,” Thompson said. “The reason you don’t see a lot of foreclosures locally is these are all local banks, local bankers that have stayed home and made good, sound credit decisions with properly structured loans. None of us can protect against massive job loss, or something like that,” but he said, most FDIC-insured banks did what they have always done.
“We didn’t make the bad loans when everyone else was during the boom,” Bauer said. “It’s irrational to think that we’re going to do it now. Frankly, we’re probably a little more cautious — I like to say Wisconsin banks are conservative and boring — in their lending underwriting ... Banks will lend, but they’re going to lend to creditworthy people and there’s really nothing you’re going to do get us to lend irresponsibly.”
Local bankers agree.
“Our overall evaluation and manner of judging what is acceptable credit has not changed,” Thompson said. “You hear a lot about credit scores and how you have to have higher credit scores … Creditworthy is a range of scores. The bottom end of that is typically not any different than it has been. The better the credit, you’ll do even better down the road.”
In spite of the economic downturn, creditworthy borrowers can still benefit from low interest rates.
“We’ve been setting records the last three months for our mortgage services division for mortgage refinances. (Interest rates) clearly are at historic lows and we’ve just had resounding success in refinancing in the last three months. We’ve had records every month.” Thompson said. “Creditworthy borrowers are really taking advantage of this and getting themselves postured for the future.”
Superior Savings Bank is also seeing a good amount of business as homeowners take advantage of lower interest rates.
“What we’re seeing in our refinancing now is a good amount of those mortgage company loans coming back to us,” Stack said. “The people are not just our customers who are refinancing. They have previously taken out a loan with a mortgage broker and they’re coming back to the local financial institutions.” Locally, he said, appraisals aren’t really affecting the ability to refinance. If they were he said, bankers would encourage people not to proceed.
Thompson said property is turning over at a slower rate, but it is not at deeply discounted rates from where they have been.
“Our fairly level economy in this area has really worked out well for us.” Stack said.
“It’s going to get back to what it was and I think that’s a good thing,” Thompson said. “There’s a watershed of opportunity for community banks now to draw back customers that got lured away by fancy marketing campaigns and or brands that were built up to be sturdy when they were built on a house of cards.”