By Keith Benman, Times of Northwest Indiana
keith.benman@nwi.com
As the subprime crisis created havoc on Wall Street, financial conglomerates along with sub-prime lenders continued to flood Northwest Indiana with high-priced home loans, a Times computer analysis of federal mortgage data from 2007 shows.
Most local banks stayed above the fray, with the lion's share of risky loans coming from lenders from outside the region.
They spread their high-priced largesse to virtually every corner of Lake and Porter counties so that well over one in five approved region home loans, representing $518.6 million in total lending, were of the high-risk variety, federal records show. That accounted for about 17 percent of the $3 billion market in home loans orginated in the region in 2007.
In all, 4,984 subprime loans were originated in the two Northwest Indiana counties in 2007, representing about 22 percent of all originated home lending.
MORE: Interactive map of sub-prime loan quantities in the region.
"It was the magic money of the U.S. economy and masked what was really going on, which was rising expenses and declining wages," said Gerri Detweiler, a credit adviser with Credit.com.
Just 20 banking conglomerates and subprime mortgage companies -- none headquartered locally -- wrote up well over half those high-risk mortgages, the Home Mortgage Disclosure Act reporting data shows. That represented about 13.5 percent of the overall mortgage market here.
The local effect
Local bankers say it is no surprise that many homes financed by the sub-prime loans identified in The Times investigation are now in foreclosure.
"We knew many of these nontraditional lenders ... were originating loans that were basically junk," said David Bochnowski, CEO of Munster-based Peoples Bank.
And even though local banks accounted for a minute portion of sub-prime lending in Lake and Porter counties, the region's banking institutions still were affected by the red-hot market in high-interest loans for borrowers with shaky credit.
Customers would often check out the sub-prime lenders and then come into American Savings in Munster and ask: "Now what can you do for me?" American Savings CEO Mike Mellon said.
Often there was nothing banks like American Savings could do to compete with the low- or no-downpayment loans offered by subsidiaries of Wall Street conglomerates and the smaller subprime outfits, Mellon said.
"We would say, 'How are these guys doing this?'" he recounted.
Above the fray
Home Mortgage Disclosure Act data supports the contentions of Mellon and Bochnowski that most local community banks stayed out of the sub-prime lending business.
Peoples Bank approved just 12 home loans in all of 2007 at rates significantly above rates for prime borrowers, the data shows. That represented less than 5 percent of home loans originated by the bank. American Savings originated one such loan.
That compares with the 196 subprime loans done by London-based HSBC subsidiary Beneficial, which represented 76 percent of its business in the two counties. Or the 99 done by Equifirst Corp., a subsidiary of London-based Barclays PLC, which represented 96 percent of its business here.
Reaping what they sowed
The toll of the subprime crisis was made plain by the fate of those companies that engaged almost exclusively in high-priced lending to people with shaky credit.
HSBC started closing down its Beneficial subsidiary in March and has taken a $10.6 billion loss on its U.S. businesses because of the subprime collapse. Barclays PLC closed down Equifirst a month earlier after sustaining deep losses on its U.S. investment.
By the end of 2008, the U.S. Congress had to approve a $700 billion bailout package in order to rescue some of the nation's most venerable financial institutions, including Citigroup and Morgan Stanley.
There is a big contrast between how subprime lenders and local banks did business during the sub-prime lending era, Indiana Bankers Association Executive Vice President Paul Freeman said.
"Community banks have a much longer-term relationship with a customer than just the one transaction," Freeman said.
Also, local community banks for the most part kept loans they originated in their own portfolios and shied away from the risks that the big financial houses and subprime mortgage outfits were taking, Centier Bank CEO Michael Schrage said.
The local contrast
Merrillville-headquartered Centier, run by the Schrage family for 114 years, competed with the big boys, including Wells Fargo, JPMorgan Chase and the former Countrywide Home Loans when it came to overall loan volume in Lake and Porter counties in 2007, the federal lending data shows.
But the contrast locally is apparent when considering sub-prime lending.
JPMorgan Chase, Countrywide and Wells Fargo originated a combined total of 1,108 high-interest loans in the two-county area in 2007, the data shows. For JPMorgan Chase and Wells Fargo, that represented more than 27 percent of the two companies' local lending.
By contrast, Centier Bank originated just 35 high-interest loans, representing 3.1 percent of its business here. Schrage said some of those loans may have been loans for second homes.
Wells Fargo sent the Times an e-mailed response to questions about its sub-prime lending in Lake and Porter counties in 2007. More than half of those loans were done by its Wells Fargo Financial subsidiary.
Wells Fargo Financial makes debt consolidation loans, most of which are nonprime, as part of the company's commitment to serve consumers across the credit spectrum, according to the statement from Wells Fargo spokesman Jay Lawrence.
"Wells Fargo does not make these loans, or any loan, unless we believe the borrower can repay it," Lawrence said.
JPMorgan Chase did not respond to requests for comment.
The candy store
But financial analysts across the country now believe that the glut of subprime lending to customers with shaky credit and financial means opened the door for the current recession as more and more borrowers defaulted on their loans.
"There were a lot of people when someone opened the candy store who just couldn't resist," Schrage said. That included both borrowers and the largest of U.S. banks, the veteran banker said.
There are times, however, when home lending to people with subprime credit can work for community banks and borrowers, Schrage and other local bankers said.
Bochnowski, of Peoples Bank, said some borrowers may have low credit scores because of an event in their past but that a solid income and good recent credit record can persuade a bank to lend at slightly higher rates.
He said he now notices a new trend in subprime lending. Some homeowners with mortgages from outfits including First Franklin Financial are coming in to take advantage of low-interest rates to refinance and rid themselves of their high-priced debt.
First Franklin Financial Corp. was among the lending companies that originated the highest volume of subprime loans in Lake and Porter counties in 2007, originating 342 subprime loans representing $38.2 million, federal data shows.
"What really triggered all of this is we got away from understanding putting 10 percent or 20 percent or even more down on a home was something the borrower wanted to do," Bochnowski said. "People somehow got it reversed."