story & photo
by Alexis Ann
As part of the Resident’s Financial District series featuring local bank presidents, this is a discussion with Duncan Stoddard, President, Chelsea Groton Bank since 2000.
Alexis: “Interest rates are falling. How is this good for the economy? What concerns do you have?”
Duncan Stoddard: “It’s particularly good for the economy because it encourages people to get interested in the housing market.”
“As far as concerns, it is not really a concern. It’s a natural event. You can get a 30-year, fixed rate mortgage for around 5%, which is historically, a low since 2003. To give you an example, the first mortgage I ever had on a house that I bought in 1973 was 7.25. In 30 years, I never saw a better rate until 2003. Rates of 5-percent are like rates out of the 1950s and that’s where we are today.”
“So, here’s what’s going to happen… No matter how severe other things are, people look at those rates and they say, ‘Wow, this is a once in a lifetime opportunity. Let me go out and at least refinance, if I don’t have a rate that’s comparable.’ There are still people who missed that boat in 2003 and want to take advantage of the lower rates. Or, it will encourage people who are saying, ‘Hey, I’m not going to go out and sell my house, right now, because prices are still down but, I’m going to put an addition on my house.’ So if they are employed, have a good income situation with a good credit rating, and considering doing anything, now is a great time to do it because of the low rates. If someone increased their loan from $250,000 to $300,000 at 4.75 or 5%, it’s tough to beat this deal.”
Alexis: “Is this how to stimulate the housing market?”
Duncan: “It will definitely stimulate the housing market. The recession will not stimulate the purchase housing market, as much as, it normally would, but I think the timing of it is. That is, we are coming into the spring. There is just something about January, February, and March that gets people itching and thinking about springtime and that means, ‘I’m going to do something to my house,’ or ‘I’m thinking about moving,’ or ‘I’m going to check out houses that are on the market.’ There are a lot of houses on the market. I’m hopeful that this will give people an opportunity to actually purchase new houses. It would be a great help to the economy across the whole country.”
Alexis: “What would be the catalyst to get us out of this state of affairs?”
Duncan: “If the whole country starts moving again with housing and things start turning over, and there are purchases and refinances and that can be a very strong catalyst, in terms of making things happen. Sometimes it doesn’t take too much of that type of demand to also start prices moving up again. No guarantees here, but I’m just saying there are patterns to things. And I have certainly seen that before. Activity begets activity, which in turn, stimulates demand.”
“Whether we’re here or in Florida or California, there is a huge supply out there of several months, if not a year’s worth of supply in some places. If you begin to decrease that number, that’s good, it increases the demand, and prices will go up.”
Alexis: “How do people refinance when the value of the property is less than the outstanding amount of the mortgage?”
Duncan: “There are lots of circumstances under which you can refinance. The standard thing is 20% down and finance the 80%. If somebody has 10% down, or less than 20% down, you can get Private Mortgage Insurance or PMI. That covers the differential and that enables you to put less down, 10% or 5% down and still get a mortgage. But when you enter into a situation where a place is worth $250,000 and the mortgage is $275,000, you’ve got problems. You’re going have to wait for the market to come back.”
Alexis: “Are property values in our area holding?”
Duncan: “We’re better off here in SECT than in the rest of the State and Connecticut is better off than most of the rest of the country. An article in a national banking publication, talked about how houses have depreciated in the last year. Connecticut was one of the least in terms of housing depreciation. The maximum depreciation was in Merced, California. This was as of June and since June, a lot more has happened. I’m referring to what’s occurred since September 1st. So values are going down even more. In the same report, it stated that Hartford and Norwich properties depreciated less than 3%. Again, more has happened since then, but it’s probably proportionally correct. There are places in the country which have been hit with depreciation which is now up to 50%.”
Alexis: “So, it’s all about location.”
Duncan: “Location, location, location! There are places along the shoreline that probably haven’t gone down in value. There are some sales that can demonstrate that prices are very stable or gone up a little bit. That is good news for us.”
Alexis: “Would you agree that the media is helping to kill business?”
Duncan: “Oh, there’s no question. The media scares people to death. Again, economically speaking, the average consumer is scared in an environment like this. Especially when they see big picture things they’ve never seen before like the Lehman Brothers collapsing and Merrill Lynch being taken over by Bank of America.”
“The average person says, ‘What the heck is going on?’ So, he takes his hands and puts them in his pocket and he holds onto his cash. I think that the media exacerbates a lot of that because the media business is about entertaining while informing. I say entertain because they have to get people’s attention. They are going to get people’s attention talking about some car crash, not about some good deed. Unfortunately, it’s heavily weighted in terms of the dramatic. It’s sensationalism.”
Alexis: “Or say, ‘Maybe I’m going to take my money out of the bank.’”
Duncan: “Yeah, right. ‘Is my bank safe?’ Even though we put ads in the paper and we send out flyers to our customers, we have slowed down a lot. There was a period of time, particularly between September and November, when almost everyone I ran into was asking, ‘I’m sure Chelsea Groton is doing fine, right?’”
“I knew it was a question and not a statement. And of course, I did more than reassure them. Not only are we doing fine, but we are having a really good year. We did as many loans this year as last year. It shows you that the business is up. And, we are probably going to end up the year not too far off what we did last year in terms of that. We have no sub-prime loans. We make all of our loans here locally and according to strong underwriting standards. Why would we have any sub-prime loans? We just don’t make those kinds of loans.”
Alexis: “Is your business up because of the criteria you use to give loans?”
Duncan: “Yes, we have a lot of lenders that are conservative. We use fairly strict and straightforward underwriting criteria. We have lots of liquidity and plan on keeping it that way. We have plenty of money to lend to someone who has the ability to pay it back. That is, has a job, good credit and sufficient collateral. We don’t make 100% finance, interest only or sub-prime loans.”
Alexis: “Sub-primes are dangerous?”
Duncan: “That’s a whole article there. The whole thing about Fannie and Freddie is it started with Congress. It started with CRA, Community Reinvestment Act. We needed to make loans available to everybody of every class, of every type. Everybody in America should own a home. And I would love it if everybody in America owned a home, but you’ve got to do it on the basis of one’s ability to be able to pay the money back.”
“We are very straightforward. We haven’t changed our underwriting standards. We’re doing the same old thing. If something comes along that looks too attractive, be skeptical. For example, Wall Street said, ‘This package of loans over here that are called sub-prime that we can secure, looks attractive because we are going to get a 9% commission.’”
Alexis: “So, Wall Street thought they could make big money on sub-primes?”
Duncan: “Right, 50% more in commission. They though it was worth the risk especially because they were just mortgages. No one knew how much this balloon was expanding. In 2007, there were about 1.5 trillion dollars worth of mortgages in the United States and 600 billion of them, or 40%, were sub-prime.”
“Sub-prime loans were almost a category that was created. It’s not that there hasn’t been that type of loan hasn’t been made in the past for someone who didn’t have perfect credit, somebody who couldn’t quite afford to pay, but you do something for him or her. But the problem is, it expanded to the degree that they had to give a name to it: Sub-prime.”
“Then another whole category that developed is Alternate-A. Alt-A is a type of loan that is sub-prime too, but it’s not quite as bad. They said to call it Alternative-A Loans. Alternative-A Loans are loans you make to somebody, who can afford to pay it, their credit is good and everything looks good on the surface, but they just don’t have the down payment. They need 100% financing. An Alt-A loan is can also be a loan where they don’t verify the income.”
Alexis: “Is the same thing starting over again? My mailbox is filling up with refinancing deals, again. For example, ‘We will refinance you,’ ‘You may have qualified for lower interest,’ or ‘You pre-qualify or ‘You are pre-qualified for $100,000 just sign below’.”
Duncan: “I would agree, but that’s just because of the rate structure. That’s because the rates are so good that they know that a 5% rate, just as an example, gets people’s attention. So in case people are not waking up to that, they are trying to shake people loose from this fear that they may have of going out there to refinance or purchase. They are saying, ‘Hey listen, wake up! We are back to historically low rates, and you better take advantage of it. And we’ve got a deal for you.’ And it’s just like anything else; they are trying to get more market share. It may be an opportunity to get customers that are someone else’s customers.”
Alexis: “Chelsea Groton was offering a 10-year fixed rate equity line of credit. How did that work for you?”
Duncan: “It was a big hit. It was very simple to get into. There were no attorney fees, no appraisal fees and no closing costs. To qualify one still needed to have good credit and meet certain criteria. It was a good deal for us and a good deal for our customers.”
“If someone is thinking about buying another house, they are usually concerned with selling their own house first. If someone wants to put an addition on, or someone wants to refinance their current mortgage, and their rate is at 5.75 and they can get it at 4.75, do it!”
Alexis: “At how many percentage points should a person refinance? Is it doable to re-fi at one percentage point?”
Duncan: “The one word answer is, NOW. I mean that seriously. No matter what someone’s circumstances are, you have to look at it unless you have 4.75% rates from five years ago. They aren’t going to do much better unless that rate is due to expire. For someone who has enough of a differential, you’re not going to see it much lower than this. So right now is the perfect time to do it, for most people.”
“For a full percentage point it is definitely worth it. It depends on what type of other costs there would be. If you’re not paying a point – which is one percent of the total amount – no points, just normal fees, an appraisal, and an attorney is required-it’s worth it. Also, it depends on how much money one is borrowing. Let’s say it’s a $100,000 loan, or a $200,000 loan, or a $300,000 loan, if you are at 6% and you can get 4.75 or 5, it’s worth it. Another reason to refinance is if a person has an old rate for 30 years, and their situation changed in that they can afford to pay it off in 15 years.”
Alexis: “What is the difference between a bank, like Chelsea, and a mortgage broker?”
Duncan: “Banks are highly regulated. We want to be in good shape so we stick to strong underwriters. A mortgage broker doesn’t own that loan. They don’t put it into the portfolio. They hand it off to the next guy. They’re interested in collecting a commission, putting money in their pocket. That’s really their interest. So what they’re looking for is volume. They’re not necessarily looking for quality. If you look back at all the sub-prime loans, brokerage houses, like Countrywide, individual brokers, and others who did not have a vested interest in what they were doing made most. They were selling it off to another entity and being secured by it.”
Alexis: “Is this the case for Wall Street, too?”
Duncan: “Yes, the same thing with Wall Street. That’s why Wall Street got in over their head because, guess what? They didn’t put it in their portfolio. Not typically. I mean, they were securing it, thereby making it into a security and selling it again. They were making their money the same way a mortgage broker does–on a commission. Then, they were getting paid a fee for selling that same security to somebody else. Unlike a bank, as the loan walks out the door from a broker, the brokerage has no further responsibility unless the loan ends up in foreclosure.”
Alexis: “So what’s the further responsibility?”
Duncan: “Well, the ultimate responsibility comes down to those sub-prime situations. They were packaging the securities and somebody bought them. Just look at someone like Wachovia, they had $62 billion worth of sub-prime mortgages. That is, $62 billion for a $325 billion bank. So a large percent of their portfolio was in sub-prime garbage.”
“How do you make all those loans? They did the same thing that everybody else did. They went out there and said, ‘Gee, these are mortgage backed securities.’ Now, historically, mortgage backed securities were fairly safe, but you do have to look at the underlying collateral. A lot of people looked at it and said, ‘Well, this is paying 9%; this is paying 9.5% and that’s a whole lot better than the 7.5 or the 6. I’m going to put in a pretty good chunk because it’s just mortgage-backed securities. That’s why big places, like even a Wachovia, got into big problems because they bought tons of this stuff and Wall Street sold it.
“Some of it is highly unusual because Fannie and Freddie went under. Banks for decades have used it as if it was government treasury or agency that was perfectly safe. We all used it. Who would have thought Fannie and Freddie were going to go under? For decades, selling mortgage backed securities’ was generally acceptable and they were generally safe, but that’s because this sub-prime situation did not exist to this degree.”
“In 2007, 40% of the mortgage market was sub-prime, $600 billion, not $600 million, but $600 billion. That’s where the problem is. It was the volume. If there was $60 billion out there spread all around the country and Wachovia loses $2 billion in sub-prime loans, then so what? But, they can’t lose $60 billion. That’s the problem. It was the amount of this junk that created the problem.
Alexis: “Did the financers know what was happening?”
Duncan: “It was like a black fog. It just sort of starts creeping up on you and first thing you know the whole thing is descending on you. Nobody realized the degree of the numbers until it fully exploded. It all started really growing precariously in 2004, 5, 6, and 7. There were about $1.5 trillion worth of sub-primes. That’s a lot of bad loans–$1.5 trillion worth. Again, the problem is the volume. It’s not like there haven’t been bad loans made, or sub-prime loans, but all of a sudden they got a name in 2004, 05, 06, and 07.”
“Bankers have made 100% finance loans, interest only loans. They made loans to people that didn’t have perfect credit. We’ve done that. We’ve helped customers with credit or situations that weren’t exactly perfect, but we knew they would pay us. That’s not really a sub-prime.
Alexis: “What’s your take on Madoff, $50 billion in.”
Duncan: “That would never happen in the bank industry.”
Alexis: “Because of the regulation?”
Duncan: “Oh, yes. As strong as we are, as healthy as we are, we still get a regulator in here, once a year, or sometimes more frequently for other different types of exams. We get a major rating by the state banking department or the FDIC – once a year. They go through us from soup to nuts and they cover everything. They don’t leave any stone unturned. There’s lots of funky stuff that happens on Wall Street, you just can’t do as a bank. And Madoff was off in his own world, saying he was doing this and making these 10 or 12 percent returns every year, which weren’t really happening. And nobody was looking over his shoulder.”
Alexis: “If someone comes to you stating they can get 4.4% and you are offering 5%, what do you say to them?”
Duncan: “Calculate the fees and points.” When a person comes to Chelsea, he or she gets full disclosure of costs. If they come in and they sit down us, eye-to-eye, they are told this is how this is going to work. This is what the rate is. This is what your fees are for the appraisal, for your closing costs and other things. This is exactly what your payment is going to be. This is how it’s going to work. Then you can trust that.
Alexis: “That’s why you are strong, safe, and secure?”
Duncan: “Exactly. That’s why we have $10 million worth of capital. Well, actually more than that, 15 or 20 now. You’re going to find out, as I said, we had a good year this past year and lot of banks are not going to have a such a good year.”
Alexis: “That lack of trust for financial institutions. That little period of time was very destructive?”
Duncan: “People were concerned about keeping their money in the bank. Are we back to keeping it under the mattress? You’ve got to be kidding me!”
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