Independent Banker - December 2018 - 27

Next: Simultaneous bond buying and selling
Another strength in the market is that community banks
that do construction lending are seeing strong business.
" This is also a good sign, " Haynie says.
Historically, community banks have tended to have a
conservative strategy when it comes to mortgage lending.
" Community banks tend not to go overboard with lending,
including mortgage lending, " says Haynie. They look carefully
at appraisals, and they don't chase every deal. " When
it comes to mortgage lending, community banks should
really just continue to do more of the same. "
Tried-and-true strategies
One community bank that continues to rely on tried-andtrue
mortgage lending strategies is $500 million-asset The
Peoples Bank in Coldwater, Ohio. " With so many millennials
entering the workforce and typically generating more
income than their predecessors, I think home sales will
remain strong into 2019, " says Jack Hartings, president
and CEO. " If the Fed continues to raise rates and the yield
curve does not invert, we will see higher mortgage rates.
That will cut into home affordability, but I see that only as a
minor headwind in the housing market. "
In terms of mortgage lending strategy, Hartings believes
that it comes down to common-sense underwriting and
putting people in homes they can afford. " Try not to hit the
peak debt ratios when qualifying the borrower, " he says. " In
addition, continue to monitor the appraisal thoroughly for
inconsistencies in comparable property sales prices, adjustment,
days on market, etc.
" Our typical customer is buying a home they plan to live
in for the next 20-plus years, so short-term fluctuations in
their home value are not devastating. "
Hartings believes that community banks need to follow the
same formula that kept them, for the most part, afloat during
the financial crisis: common-sense underwriting, fully amortizing
loans, no bait-and-switch rates, and not stretching
underwriting with " creative " or no-down-payment lending.
" The best thing community banks can do for their customers
is counsel them on the responsibilities of buying a
home and help them be prepared to meet those homeownership
obligations, " Hartings says. " When you know your
customer, doing this is instinctive. This keeps both the bank
and the customer out of hot water when a property value or
income decreases. "
Another bank with a successful and conservative
strategy is $320 million-asset First Option Bank in
Osawatomie, Kan. " We don't bet either way on which
way prices are going to go, and we have remained out
of the spec construction lending [arena] since the 2007
bust, " says Blake Heid, president and CEO. " We still do
custom construction projects, but they all qualify and have
reserves like they are supposed to. "
Heid believes that if community banks are in the real estate
lending business, they should have a nice portfolio of real
estate loans in various markets, in many communities, in
different neighborhoods, on different amortizations and at
various stages of their life cycle. " I don't think there is any " The
best thing community
banks can do for their
customers is counsel them
on the responsibilities of
buying a home and help
them be prepared to meet
those homeownership
obligations. "
-Jack Hartings, The Peoples Bank
thing you can do to hedge real estate prices, " he says. " If you
stay consistent with your underwriting and follow appropriate
guidelines, you should keep your losses in line regardless of
prices of homes. People really do their best to pay their loans. "
Downturn in the cards?
W.R. Robbins, CEO of $800 million-asset Farmers Bank &
Trust in Great Bend, Kan., is one community bank leader
who feels there could be an eventual downturn in the market.
He's therefore following an even more conservative
strategy. " We're trying to be more conservative in residential
mortgage lending. While still meeting our customer
needs, we are working hard to require additional cash down
or obtaining private mortgage insurance, " Robbins says.
He adds: " With 2019 around the corner, we are being
cautious with underwriting and loan pricing. There are
many interest rate models that indicated they could
decrease during the third quarter of 2019. We have to listen
to the economists but also strive to meet the demands of the
banking communities we serve. "
William Atkinson is a writer in Illinois.
independentbanker.org Q 27
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Independent Banker - December 2018

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