Online Exclusives
Community-based Lending Relief
Shelter in the Storm
By G.M. Corrigan, photo: Jason Turner
Nationally, the economic signs are flashing red; regionally, less so — but they are alarming, all the same. And growing. Since the subprime mortgage default-fueled “Great Recession” quietly commenced in December 2007, some 45 federally insured banks —worth $241 billion in deposits — have failed and were conserved by the FDIC, at a cost of two-thirds of its $52.4 billion insurance fund. In the same period, as national household wealth plummeted with a 15.5-percent drop — to $165,400 — in the median existing home price, the unemployment rate jumped from 4.8 percent to 8.5 percent. As a result, cumulatively, more than 13 million American workers are idle.
These developments have stoked a seething home ownership crisis that, according to the Mortgage Bankers Association, jacked delinquencies and defaults from 7.86 percent to 11.18 percent nationally — conjuring the economist’s dreaded “adverse feedback loop,” where illiquidity and recession consort in a deflationary binge. A negative 6.3 percent 4Q, 2008 U.S. gross domestic product refers, as does a World Bank forecast of a 1.7 percent contraction in global GDP for 2009, the first pullback since World War II.
The compounding conditions also accounted for a current, national foreclosure sales rate of some 2,900 U.S. homes per day, according to The Washington Post and a panel overseeing the $700 billion Troubled Assets Relief Program. In all, 2008 accounted for almost $13 trillion in stock market and real estate losses and saw the U.S. banking sector, which received $620 billion in taxpayer assistance but lost a record $262 billion in the fourth quarter, lend less than in 2007, according to The Wall Street Journal. And that’s the upside outcome of a fall prospect that could have seen “the financial system of this country and the world melt down in a matter of days,” said Senate Banking Committee Chairman Senator Chris Dodd.
But the billions invested in the 522, sometimes unwilling TARP recipients is just a fraction — given the new $200 billion TALF, $789 billion in stimulus spending, a recent toxic asset rescue effort and a proposed $3.5 trillion U.S. budget — of the total earmarked to unfreeze the nation’s credit markets and usher in what President Barack Obama calls a “new era of responsibility.”
Locally, in a region that The Washington Post called “considerably stronger” than the rest of the country and a state that boasts the highest median household income, Washington and Frederick counties respectively averaged 5.7 percent and 3.6 percent unemployment rates for 2008, according to the Maryland Department of Labor, Licensing and Regulation.
These rates, however, were up 1.3 percent and 0.7 percent over 2007 and contributed to a respective 4Q, 2008 foreclosure filing rate spike of 33.7 and 22.9 percent over 3Q —though Washington County’s 4Q, year-over-year comparison was slightly down (Frederick’s was up almost 39 percent). “High” and “very high” foreclosure event “hotspots” continue in both counties and underscore a recovery challenge that local community lenders — given their big brothers’ balance sheet blues — are scurrying to address.
‘Credit Unions are Lending’The fact that, on average, the nation’s 8,200 federally insured credit unions have not lessened their lending in this straitened credit environment is a point of pride at the movement’s national trade associations and at the Maryland-District of Columbia Credit Union Association in Columbia, Md. “There is no credit crunch at credit unions,” said Sarah Turner, public affairs director for the 170-member association of member-owned, federal tax-exempt, financial not-for-profits.
In fact, total credit union lending was up 7.5 percent in 2008, according to Mark Wolff, senior vice president, communications for the Credit Union National Association. In Maryland, it was up 6 percent for the year — to $10.45 billion — Turner reported.
“Last year, we had one of our best years ever,” said Lisa Whitaker, CEO of COMSTAR Federal Credit Union, a 75-year-old, Clarksburg-headquartered cooperative that has $180 million in assets, 19,000 members and three branches in Frederick. “We had strong share [deposits] growth and a return-on-assets that, at 1.12 percent, was five-times above our peers,” Whitaker added, noting that her banker colleagues “want to know how we’re doing what we’re doing.” Legally restricted to markets in Frederick City and several hundred companies — or “select employee groups” — the nine-branch, 18-ATM not-for-profit has a reputation for versatility, innovative marketing and effective community relations.
Accordingly, the credit union — whose market share grew by 3.63 percent in 2008 — leverages the industry’s cooperative dynamic by opening new branches as cost-saving, multi-credit union service “outlets.” COMSTAR also plans in 2009 to migrate its online services to include remote devices, and logged $3.3 million in member mortgage work-outs in 2008. “I think there was a flight to safety in 2008,” Whitaker said. “So we focused on the fact that we’ve had 75 years in the community — and I think that had a lot to do with [our growth].”
Not surprisingly, COMSTAR does no subprime lending — a practice that is reinforced by a strict regulatory regime that discourages risky underwriting, limits credit union investment options and bars funds-raising from the capital markets. But Whitaker doesn’t see these limitations as impediments to serving the community. “Our cooperative structure allows us to make loans to people who might be turned down elsewhere,” she said.
Finding a Way“One thing we’re willing to do is at least sit down and talk with people and try to find a way to make something work for them — whether it’s a consumer or a business loan,” Rick Miller, CEO of Frederick County-based Woodsboro Bank, said of his 110-year-old bank’s policies. Woodsboro is a $190 million-asset community bank with seven north Frederick County outlets, 14 ATMs and a willingness to lend, despite conditions that have bumped delinquencies by almost 1 percent year-over-year and tripled the bank’s projected FDIC insurance premium to $198,000. The $150 million-in-deposits bank, which does mostly commercial real estate lending and sells all of its 30-year residential paper to the secondary markets, registered a 5-percent jump in total lending and a 2 percent up-tick in deposits in 2008.
“We’re still profitable; we’re still paying dividends,” Miller said of the privately owned institution, which shunned subprime market blandishments and has “fairly conservative” underwriting policies. And he attributes much of that success — despite a sharp recession that he lays at the feet of reckless securitizers and the poor underwriting policies of non-community bank lenders — to Woodsboro’s down-home touch.
“We’re not interested in transactions for pure transaction [sake],” said Miller, noting that Woodsboro does no securitization, has taken no TARP money and recently won the Carroll Creek Rotary/Frederick News Post’s business ethics award. “Our staff is comprised of salaried people,” he said, adding that the company’s strategic plan asks them to donate at least 600 hours of community service per year. “They really are concerned about the person they’re dealing with. And we’ve not had, up to this point, one owner-occupied residential foreclosure filing.”
Asked when he foresees the current downturn ending, Miller would only say that 3Q, 2009 will be telling. “I think we’re in uncharted waters. But the key to it are the consumers and [a return to common-sense lending].”
Keep on Truckin’Founded in 1968 by its original sponsor, Mack Trucks, Inc., Hagerstown’s Bulldog Federal Credit Union is a $110 million-asset, 24,000-member community credit union that grew total lending (and leases) 9.6 percent in 2008, year-over-year. “My first plan of action was to diversify,” said David Barrett, Bulldog’s CEO of 26 years. “We started expanding [through employee group additions because] Mack Truck was fluctuating with the economic tides.”
The credit union, which was granted its Washington County field-of-membership in 2001, has a capital ratio of 12.6 percent, a return-on-assets of 1.6 percent and a loan-to-share ratio of 65 percent. It did, however, lose some market share in 2008. “Up to December of 2008, our entire mortgage, all real estate — residential and commercial — had zero losses,” Barrett said. “Since then, we’ve had [some]. We’re feeling the pinch a little bit, with the economy the way it is.”
With six branches, a main office in the county and eight ATMs, Bulldog has offered mortgages since 1984 and Internet connectivity since the 1990s. Its commercial lending now comprises 15 percent of its loan portfolio, and the 56-employee cooperative just completed a $600,000 upgrade of its computer system. Anyone who “lives, works, worships or attends school” in Washington County can join by depositing $25 in a share savings account.
Barrett, whose business plan stresses transactional volume, said the recession isn’t seriously affecting business. “And we don’t see that happening.” He cited the credit union’s emphasis on technology, niche marketing and personal service — and called for Congress to remove its statutory cap on federal credit union business lending. “To tell a member who wants a business loan, ‘I can’t do it,’ what message does that send [in this climate]?” Barrett asked, noting that banks don’t have a cap. “That’s negativity.”
G.M. Corrigan is a former reporter for a national, financial services weekly and a freelancer who has written extensively about financial matters and cooperative business.
