Damariscotta Bank & Trust President Thomas Finn asserts there are reasons why the community banks are weathering problems that have leveled some of the nation’s financial giants.
Local community banks are somewhat insulated from the issues afflicting their larger counterparts. Finn is quick to point out the commercial banks in town are much different from the large investment banks that have recently failed.
“We take deposits from regular people, and lend that money out to local businesses,” Finn said. “We’re doing the usual banking, meeting the needs of the community, which makes us less likely to reach [take a risk].”
All banks participate in the secondary mortgage market, he explained. When they write a homeowner’s mortgage, they sell it on the secondary market to Freddie Mac or Fannie Mae. According to Finn, this allows banks to offer more mortgages to more people.
According to Finn, Freddie Mac and Fannie Mae then packages thousands of these mortgages together as investments, which mutual funds, banks and insurance companies then purchase because they are considered safe investments.
“If they are underwritten properly, and have a qualified applicant, the system works well,” Finn said. “But, the investment banks were packaging and purchasing mortgage investments that were subprime. It was risky because they weren’t [the applicant] qualified properly.”
There was a special “no asset, no income” verification program available, where the underwriter didn’t try to verify income or assets and took it on the faith of the borrower, according to Finn.
This was done by various mortgage companies and brokers, he said, adding that
“It was a sound concept,” he said. “It makes sense to redistribute capital so more people can own their own homes. The financial institutions and others didn’t adhere to traditional underwriting standards.”
Restructuring Fannie Mae and Freddie Mac is essential, because banks still need a conduit into which to sell their mortgages, Finn explained. “Without the secondary market, banks can only lend what they receive in deposits,” he said. “In that case, how many mortgages can I make without running out of money?”
Finn said he believes the word crisis in regard to problems with housing is overblown. There are certain regions, with higher foreclosure rates, he said, but due to price stability, housing is better in
According to Finn, problems arose when people started speculating by buying several homes with the hopes of prices continuing to increase. “People just walk away from the properties and the banks foreclose,” he said. “That is a different story than people who are buying a home to live in.”
Finn discussed the slight increase DB&T is seeing in the amount of funds being deposited from larger banks, due the problems within the industry, presumably for fear of a run on the bank.
The delinquency rates on loans, and foreclosure rates for homes, have not been affected.
The Federal Deposit Insurance Corporation (FDIC) insures that personal checking and savings accounts up to $250,000, since the rescue package was passed. Finn explained banks offer a little extra protection to towns that have accounts greater than the federally insured limit.
“We have other mechanisms for ensuring money above $100,000 stays safe for our local towns,” he said. “We can pledge investments as collateral to cover those accounts.”
Newcastle Chrysler Dodge Jeep President Randy Miller explained he hasn’t seen consumer credit tighten up much, local banks are continuing to loan money to consumers to buy vehicles from his dealership.
“The interest rates for those consumers are some of the lowest I’ve seen in years,” Miller said. “Our service and parts departments are doing very well, but sales numbers are down.”
Miller explained dealers have taken huge losses as a result of the drop in prices for trucks and sports utility vehicles.
In addition, costs of borrowing money for small businesses are going up, and access to commercial credit has been reduced, according to Miller. Increasing costs for car manufacturers are being passed on to smaller car dealers.
Miller asserts this is a great time for car buyers. “It’s a bright spot for consumers, it’s a buyer’s market,” he said. “I’ve never seen deals like this. Our local people need to try and support their local businesses through these tough times.”
Charles Colgan is a professor of Public Policy and Management at the
He explained that the national problems would not affect everyone equally. Small town banks following the traditional deposit and loan models are less likely to be affected.
“The leading edge of the issue is that credit for business is very dicey right now,” Colgan said. “The other problem is the whole economic picture has been ratcheted down.”
It is very uncertain now how far and how fast the problems will spread, according to Colgan. He feels it is hazardous to predict whether small communities will be caught up in the financial maelstrom.
“The credit crisis will pull the national and