Island Escapes Mortgage Crisis

Vineyard Bankers Say Mortgages Stay at Home for Most Part; But
Telephones Are Ringing From National Meltdown

By JACK SHEA

Your mortgage is safe if you borrowed locally, and credit-worthy
customers can obtain a local mortgage as easily as last year, Vineyard
bankers said this week.

And with the national mortgage business now on the rocks, here is
the good news: Most Island banks don't resell their home
mortgages. The stay-at-home policy of local lenders and the mostly
blue-chip financial status of mortgage applicants combines to make for a
comparatively stable scene on the Island home mortgage front.

"We made a decision a long time ago to keep our mortgages in
house for a couple of reasons," said Chris Wells, chief executive
officer of the Dukes County Savings Bank. He said many Island mortgages
are greater than $417,000, the minimum amount set by bank regulators
where the secondary mortgage market comes into play. "Involving a
secondary lender requires more appraisals and additional underwriting
[by the secondary lender] and we saw no more risk in writing the larger
mortgage ourselves as jumbo mortgages rather than going into secondary
markets," Mr. Wells said, adding:

"There's a bit of sensationalism around the mortgage
business today and the actions of some unscrupulous lenders have
affected strong lenders with good lending practices." Ironically,
Mr. Wells and other Island bankers report a positive backlash for their
business.

"People are now coming to us as a result of bad publicity in
the mortgage underwriting business. We're seeing some additional
refinancing now that rates have dropped a little bit," Mr. Wells
said.

Island bankers say they've seen little presence of subprime
lenders on the Island. "This is not their market," said Paul
Watts, senior vice president of Bank of Martha's Vineyard. He
noted for example that Countrywide Mortgage, a high-profile troubled
national mortgage lender now prominently in the news, has only showed up
to compete using traditional lending criteria for jumbo mortgages.

Some have mused that perhaps the only risk for Island real estate
would occur if vacation home rentals slump.

That risk is minimal according to Mr. Wells. "We underwrite
differently if the property requires rental income to meet payments but
most people who buy second homes have thought it out pretty carefully
before they got here and they have other financial resources to use if
that [slump] would occur."

Edgartown National Bank president Fielding Moore agreed. "Most
of our second-home customers regard rental income as a bonus," he
said.

Mr. Wells said his bank's lending criteria are unchanged and
he expects to write between $55 and $70 million in mortgages this year.
"More if we can get it," he said. Year to date, the bank has
written $40 million in mortgages.

"Our lending criteria are unchanged, they are exactly as they
were," Mr. Wells said.

Unraveling the complicated national mortgage crisis shows why
stay-at-home mortgaging has maintained relative normalcy compared with
failing mortgage companies, tighter criteria and a dramatic shrinking of
available mortgage money on the national front.

Real estate is a lendable asset and over the past 20 years a new
industry of mortgage resellers with many layers, many largely invisible
to the public, has grown and prospered - until the music stopped
two months ago.

Subprime resellers sold mortgages they had written to larger
financial institutions and money sources as collateral to borrow funds
to generate even more mortgages. As a result, a mortgage is often passed
through numerous institutions before finding a home, often at a
financial institution without real estate in its portfolio.

Homeowners see the effect when they receive a letter with payment
instructions from an institution they do not know or with which they
have never done business, informing them that the institution is now
holding their mortgage,

Each reseller along the way charges a fraction of percentage point
of the mortgage before passing it up the financing chain. The system
remained intact until subprime mortgages began to sell largely outside
traditional mortgage banking. Target customers were homebuyers who do
not meet traditional mortgage lending criteria. Mortgage broker
resellers developed an arsenal of costly temporary financing devices to
qualify buyers for mortgaging, including no down payments, adjustable
rate mortgages with high rate options, second mortgages, home equity and
personal loans and in some cases, jumbo mortgages. As competition grew,
subprime resellers loosened borrowing criteria and increased the amounts
that could be borrowed, sometimes in excess of the value of property.

Many of those patchwork loans are now coming due. In recent months,
the loan default rate has increased dramatically and larger lending
institutions have grown wary. As a result, funding has dried up and
criteria tightened, rolling the financial crunch back downhill to
resellers, their homeowner customers and to hopeful home buyers.

Mr. Watts, whose bank is a division of Sovereign Bank, said
Sovereign concurred with his decision to keep mortgages here and to
grant local mortgage-making authority. "Sovereign is a large
regional bank. The Island and Nantucket are one of only two Sovereign
markets which write and hold mortgages locally," he said, adding:
"We write and keep our mortgages here because everyone else does
and because Island people want a decision-making banker they can see
face to face. If we were on the Cape, it might be a different
story."

Like Dukes County Savings, Mr. Watts has virtually no mortgages in
arrears. In addition to well-heeled clients, Mr. Watts credits the
Island mentality and work ethic. "We have a pretty good cadre of
savvy Island people. They work hard and pay their bills. If they need a
second job, they get one. They love living here and they'll work
hard to continue living here," he said. His bank has a goal of $30
million in new mortgages this year and is pursuing that goal with
unchanged lending criteria. He is interviewing for a mortgage lender to
replace a retirement in his main office in Vineyard Haven.

The Martha's Vineyard Cooperative Bank, which is due to merge
with Dukes County Savings Bank this fall, also keeps its mortgages
in-house.

Edgartown National Bank uses both Fannie Mae and Freddie Mac, the
two major federally chartered and insured institutions to hold most of
its 30-year fixed mortgages in addition to its own portfolio of home
mortgages. Mr. Moore echoed the business-as-usual approach.

"We haven't had to tighten lending criteria. Our
criteria are the same as they always were. We're continuing to
write new mortgages and I'm seeing a lot of our new business is in
the adjustable rate mortgages refinancing area," he said.