There’s been a great deal of news lately on the subprime mortgage lending market and its effect on consumers, the banking industry and the financial world in general. I thought I would share with you a few thoughts and perhaps enlighten you on Marlborough Savings Bank’s position.
The subprime market arose from the creativity of mortgage lenders and the reduction of credit requirements to make mortgages more available to a broader range of applicants. In addition, record breaking home appreciation over the last decade as well as an overall strong economy contributed to the easy availability of credit. At first glance, the subprime market was a boom to the housing market, increasing the number of home buyers and moving homes for sale out of inventory – a win-win for many!
So what happened to make subprime a dirty word? For many lenders, the ease with which mortgages could be produced and sold created a flurry of activity with short term gains in mind. Home buyers who ordinarily would not qualify based on credit history, debt to income and earnings were able to purchase homes due to the easing of credit requirements and low adjustable rate mortgages. The short term outlook looked promising – more buyers realizing their dream of homeownership. However, once the interest rate environment changed and rates began to rise, it became quickly evident that monthly mortgage payments were on the rise too. Additionally, some mortgage products such as “interest only” payments were enticing in the beginning but did nothing to hedge against falling home prices. A borrower paying interest only on a mortgage does not pay towards the principal, in essence never reducing their mortgage. In simpler terms, it’s as if you are only paying the interest amount on your credit cards every month. The outstanding balance never gets reduced and you’re available credit never changes.
How did Marlborough Savings Bank handle the subprime market? To answer this question, let me first explain our charter. As a mutual savings bank, our stakeholders are our depositors, employees and our community. We do not have investors or shareholders. This charter is important to understand since it allows us to make decisions based upon what is in the best interests of you, our customer. We do not answer to stockholders and therefore do not make decisions driven by stockholder returns. Our decisions are made with the long term financial health and stability of our customers in mind.
Our approach to subprime lending is based on those same guiding principles. Is a subprime mortgage in the best interest of every one of our customers? Most likely, the answer is no. Can the borrower comfortably repay the mortgage? What factors are key to responsible home ownership? These are just a few questions we ask to ensure that our customers’ best interests are kept in mind. Short term gains, risky lending policies and lax credit standards are not what have kept us a leading, community mortgage lender for over 100 years. We are far more interested in long term relationships with our customers.
How do we maintain this philosophy? We carefully review mortgage applications to ensure that the mortgage product we propose is the right product with the greatest value for our customer, not just for the short term. As borrower should feel comfortable with the ability to repay their mortgage for several years no matter what the short term interest rate fluctuations may be. It is our goal to ensure that the purchase of a home is a prudent and fiscally responsible choice that will provide the buyer and their family the comfort of a home for many years to come. If you have any other questions or would like to discuss this issue in-depth, I invite you to call one of our mortgage experts today – Martin O’Sullivan, Kathy Egan, or Shereen Fahey.