Ryan Farrell, of Crystal Lake, with wife Amy and sons Brady and Luke. Thanks to low interest rates, the Farrells got more home for their money. (Rebecca O\'Malley photo)

Community Banks: Seizing Opportunity with Super-Low Interest Rates

Home mortgage interest rates are at their lowest in 60 years, and community banks – that is, locally owned and operated institutions – are uniquely suited to help help customers seize an opportunity.

Ryan Farrell, of Crystal Lake, with wife Amy and sons Brady and Luke. Thanks to low interest rates, the Farrells got more home for their money. (Rebecca O\'Malley photo)

Ryan Farrell attends many real estate closings. A transactional attorney and Certified Public Accountant (CPA) in Crystal Lake, he’s often among the team of experts coaching homeowners through the closing process.
Documents? Check. Title? Check. Mortgage loan? Check.

But this fall, when he bought a home, the tables were turned. Instead of foot-dragging, like he commonly sees from lenders, his bank was well prepared.

“I see delays all the time between clients and their lenders because of poor communication on the lender side,” says Farrell. “That was never the case with my bank. Instead of just throwing up roadblock after roadblock, they came up with creative solutions to satisfy their regulatory obligations and ensure they were protected, while still making the deal happen.”

Unlike many mortgage advisers Farrell witnesses, Barb Kelly at Home State Bank, 40 Grant St., Crystal Lake, was prepared and committed, always welcoming.

“It’s rare at closings for the lender to be there, but I didn’t have that problem,” Farrell says. “Barb was there at the close, jumping up and hugging me after everything was through, saying ‘You did it – way to go!’”

Like many who work with community banks – that is, locally owned and operated institutions – Farrell found a staff that’s familiar, friendly and ready to assist. And, at less than 5 percent, Farrell’s interest rate is at a level nearly unthinkable just a few years ago.

As Farrell can attest to, there’s a silver lining for those who can afford to buy homes, despite instability and uncertainty in today’s economy and housing market. With interest rates hitting the lowest point in more than 60 years, now is a great time to refinance or to purchase. And because community banks are uniquely invested in their communities, they’re perfectly positioned to help customers seize that opportunity.

“I think interest rates can’t possibly go much lower than they are today, and if you can afford a refinance today, or if you can buy a home today, values are down, and it’s a great opportunity,” says Steve Slack, president, Home State Bank. “Everybody wants to wait it out, like they do with the stock market. They say, ‘When do I get in, or when do I get out?’ You’re not going to do much better than today in terms of refinancing or buying your own place, if you can afford to do so.”

The catchphrase lately is “historically low interest rates,” and with good reason. This October, banks, on average, offered a 30-year fixed-rate mortgage with just 4.07 percent interest, according to Freddie Mac. That’s the lowest these rates have been since late 1950, when montly averages were just 4.08 percent on a 30-year mortgage.

When bankers like Slack began their careers in the 1980s, they saw rates at historic highs. In fact, by 1981, rates peaked above 18 percent. Since then, there’s been a steady drop; since the housing collapse, they’ve nosedived.
“The old line was that anything under 10 percent was OK, and then probably in the 2000s or so, anything around 6 percent was OK,” Slack says.

Policymakers are gambling that these new, much-lower rates will kick-start sales in the sputtering housing industry, which holds nearly 15 million vacant housing units, according to 2010 U.S. Census figures. To the well-positioned consumer, super-low rates provide a welcome incentive. First, however, consumers must get past stringent loan requirements, and most need to sell their current home. At Home State Bank, the mortgage crew is busy.

“A lot of upper-income consumers have equity in their homes, and they’ve refinanced,” says Slack. “Personally, I’ve refinanced three times in the past three years. Rates have gone down, down, down and I’ve just taken advantage of that.”

Homeowners across our region are seizing the same opportunity; many are choosing simply to refinance. Concerned they’ll have trouble selling their current homes, many opt to stay put, investing in their current properties, biding their time until the market becomes more certain.

For those who have equity in their homes, it’s the right decision, says Jim Thorpe, CEO and president, Crystal Lake Bank & Trust, 70 N. Williams St., Crystal Lake.

“I think we’re seeing people investing in their homes just because they’ve determined that’s their home,” Thorpe says. “Many are saying, ‘It’s been long enough. I have shag carpet in my living room, and I just can’t take the ’70s shag. I’m buying new carpet.’ Personally, I’m updating my garage doors and I’m going to stay there awhile. My home value doesn’t go up by that improvement, but I’m going to stay there long enough and that’s the way I want my house to look.”

Homeowners who refinance are finding an added bonus.

Dale and Mary Batson of Crystal Lake just refinanced their home, lowering their interest rate from 5 percent to 3.38 percent. (Rebecca O\'Malley)

“If you can afford to refinance, it lowers your monthly expenditures, or if you’re a business, your monthly payments are less,” Thorpe says. “That then gives you extra cash flow to either save or spend, which should help the economy.”

“It gives us more disposable income,” says small-business owner Mary Batson, of Crystal Lake. “Month to month, it lets us use our own money, rather than giving it to someone else.”

Mary and husband Dale chose to free up some cash by re-investing in their current home. With one child still in college, they’ve put some money toward tuition and saved the rest. Working with Crystal Lake Bank & Trust, they secured a 15-year, fixed-rate mortgage with just 3.38 percent interest. They had paid 5 percent after refinancing in 2004.

The Batsons own businesses including Out of the Box, 71 N. Williams St., in downtown Crystal Lake. Though they’re not ready to refinance on that property, which they own, Mary says she’s keeping a close eye on the rates.
When that time comes, she’ll call John Mini, senior lender at Crystal Lake Bank & Trust, who helped her to secure the refinance deal in October. The Batsons, like many of Mini’s customers, found the silver lining within today’s uncertain market.

“Lower rates are going to help people to buy homes because they can qualify for more, and I think we’re seeing a little bit of that,” Mini says. “But what they’re doing a lot of, right now, is helping people refinance into a lower payment. That’s what I’ve been seeing. In these tough times, cash flow is important, so even someone who’s saving $100 or $150 a month will do that.”

Just as low rates help homeowners to invest in their current homes, they help homebuyers, too. Because rates are so low, some customers can afford to buy slightly more expensive homes that may have been out of range just a few years ago. That incentive is helping to move foreclosed and troubled homes that clog the housing market. So long as buyers are qualified with appropriate income, job stability and credit score, lower rates help buyers to get more for less.

“It used to be that things were going up so fast you just bought a home where you could afford one, but you had to go farther out from the city,” Mini says. “If you had to buy a house in Huntley, but you worked in the city, you might now be able to find a house in Des Plaines or Palatine that you can afford, that you couldn’t get five years ago. So your commute time could be cut in half, and be more convenient.”

Of course, homeowners must first sell their existing homes, which may be easier said than done in this market. However, low rates encourage potential buyers – especially first-timers and those who can sell, says Tony Sisto, CEO of STC Capital Bank, 460 S. First St., St. Charles.

“It allows people who are first-time homebuyers or looking to purchase a home to qualify for more,” Sisto says. “If rates are lower, they’re more qualified for more of a loan, so it puts more fish in the pond.”

And that’s a good thing. At least, it was for Farrell, in Crystal Lake.

Before buying a home this fall, Farrell first had to sell his previous home. It was no easy task, but he did it, taking a loss. Putting less down on this new house, Farrell secured a 30-year mortgage. The rate is slightly higher than Home State’s 4.25 percent October average, but still good.

“It’s no secret that people can’t get out of their homes,” Farrell says. “I figured between the loss I took on my previous home and the deal I got on my new home, it works out OK.”

Even if it’s a wash, lower rates helped Farrell to do more with less.

“Right now, I’m in a home that I would not have been as comfortable buying if I were paying a higher rate on my mortgage,” he says.

Vanilla is Good

For Sisto, the best mortgage products fit the customer’s needs.

“I always try to emphasize that it’s not just about the interest rate,” Sisto says. “It’s about the product and understanding your goals and your aspirations. Let’s get you in the proper product that helps you meet those goals.”

For example, homeowners in their 50s probably aren’t well-suited for a 30-year fixed-rate mortgage, especially if they plan to sell in 15 years. Instead, Sisto suggests, a 15-year mortgage, or an adjustable-rate (ARM), may be more suitable.

“What is the housing bubble? Many people were put into the wrong accounts and many people bought homes they couldn’t afford,” Sisto says. “There were lots of people who probably were not serviced properly by their mortgage broker, and the result is new rules, new regulations, requiring us to get back to the basics of Mortgage Lending 101.”

Just as lending practices are returning to the basics, so too are lending products. Prior to the recession, many customers squeaked by with exotic mortgage products like interest-only loans and negative amortization loans (paying less than the interest charged), in addition to various ARMs and government-backed products. Having been fooled once, consumers no longer have an appetite for those products. Because most banks – even community banks – sell their mortgages on the secondary market, the basic mortgage is back in style.

“Generally, we’re not doing anything that’s whiz-bang, or sexy, as my old boss might have said,” Mini says. “We’re not doing any pay options, or ARMs. We’re just doing vanilla stuff: 30-year, 15-year, 10-year conventional mortgages and FHA loans. It’s all vanilla. That’s not because it’s all we offer. It’s because that’s all anybody’s looking for.”

Many banks promote their basic menu, while also providing access to Federal Housing Administration (FHA) loans, Veterans Affairs loans, and 203(k) loans, which help a buyer make modest repairs before closing.

“I get a lot of people complaining that, geez, a lot of things keep changing, and they really haven’t,” Mini says. “They’re just going back to the way they were 20 years ago. We’re now obeying all the rules we ignored five years ago.”

Whereas before the crash, borrowers could simply state their income, avoid a credit report or put no money down, borrowers today must endure a mountain of paperwork to prove that they really can repay the loan.

“We can’t make mortgages to anybody anymore unless we can verify they’ve been working for two years and have an income,” Mini says. “We can’t just take their word for it. We have to show they have their assets by looking at their bank statements. We have to show that their credit is good, via credit scores and running a credit report. There are no longer outlets for skipping one of those steps.”

While big banks, which control the secondary market, once welcomed risky, exotic products, community banks have stood by the principles of good banking. Those age-old values guided Sisto and a team of investors when opening STC Capital Bank just a few years before the real estate bubble collapsed.

“Our motto is Service, Trust, Commitment, and it all comes back to that,” Sisto says. “Our attitude has always been to do what’s right for the client. It’s a win-win. If we do what’s right for the client and do what’s right for us, it’s a win-win every time.”

Chuck and Ann Chapple are staying put in their home, taking advantage of good schools and a great community. They’ve refinanced three times in the past six years. (Rebecca O\'Malley photo)

It’s also a matter of being available when the customer needs you. For Valerie DuCharme, executive vice president and chief mortgage lender at STC Capital, the flexibility and personal service of a small bank make a big difference to mortgage customers, especially when a loan can take months to hammer out.

“I spoke with someone recently who went to a large competitor bank and the service she received was very poor,” DuCharme says. “As a result, her ability to get a loan in the timeframe she needs has been shrunken quite a bit. We’re able to take that loan and turn it around quickly because of who we are and our commitment to deliver excellent service.”

DuCharme often goes out of her way for customers, just to seal a deal. While Ann Chapple and her husband were working out a refinance deal this fall, DuCharme once drove 45 minutes to the Plainfield couple’s home, just to accommodate them.

“The day I had to sign papers for the mortgage, I had sick kids at home,” Ann says. “So Valerie drove all the way out here.”

The Chapples have worked with STC Capital since it opened, but they’ve worked with Chris Woelffer, bank president, even longer. He’s the reason they switched from a big bank in 2005, and even though they no longer live in the St. Charles area, they’re not searching for a new bank.

“You can’t beat the personal attention to your needs,” Ann says. “Valerie is professional and courteous. This is the kind of bank we want to keep working with, and the type that we’re always telling our friends about.”

Mini similarly recognizes the local advantage. After 25 years of selling mortgages for big national companies, this is his first experience with a community bank. When he started working at Crystal Lake Bank this August, his desk was just inside the lobby entrance. Frequently, people approached him with questions, or to discuss business. Such accessibility was a very different way of doing business.

“It’s not calling up the Wells Fargo 800 number and talking to a guy you’re never going to meet,” Mini says. “A lot of the customers want to meet me. In my previous life, working with big mortgage companies, it was pretty rare that you were meeting the guy who was making the mortgage.”

Along with being there for customers, community banks intimately know their own neighborhoods.

“Our mortgage originators live in the county, so they know the area,” Thorpe says. “They’ve got enough experience to help somebody who comes in and says they’re thinking about refinancing and they think the property is worth $300,000. A lot of our people can say, ‘I’ve seen five homes appraised in your general area that are $200,000, and I’m happy to do it.’”

Silver Lining, Not Silver Bullet

Bob Shield gets the 30,000-foot view over today’s low interest rates.

As executive vice president of sales for Wintrust Mortgage, he monitors the general lending trends for 12 of the 15 locally owned and operated banks served by Wintrust. He knows that homes have never been more affordable, welcome news for an economy desperate for cash flow.

“People who’ve been able to take advantage of the refinance or to acquire these low rates certainly have more income to spend on other things besides their houses, or their commercial properties,” Shield says. “That’s the primary benefit – it’s made housing very, very affordable.”

Still, the low rates aren’t sparking a tidal wave of home sales. Shield estimates that between 60 and 70 percent of all new Wintrust mortgages are actually refinances, an indication that many homeowners are staying put, rather than snatching up existing homes. Perhaps some stay put because it’s hard to buy another home when they can’t first sell their own. In other cases, homeowners are simply preventing or prolonging foreclosure.

So what’s stopping home sales? In part, it’s a buyer’s market, and buyers are trickling in. But it’s also a question of tighter lending standards pushing away potential buyers, says Shield. What appears to be a “back-to-the-basics” philosophy, he says, may be more of a gut check.

“We call it packing parachutes,” Shield says. “We’re really careful with the loans that we write today. I wouldn’t say that we’re any more careful than anybody else in the market, but the market in general is very careful to make good loans that aren’t going to go bad as time goes on. In many ways, it’s more like the kind of lending we did 20 years ago.”

While some bankers see low interest rates as a sort of magic bullet to fixing real estate, Shield is more cautious. Instead, he says, low rates are simply one tool used to fix a complicated dilemma.

“There is no magic bullet,” Shield says. “This is a very serious time and a very serious situation, and there’s no one thing that’s going to work this out. I think low interest rates provide one component to help us work through this inventory. But interest rates by themselves can’t work through all of the inventory.”

For homeowners on the winning side of the bubble, who can afford to sell, purchase or refinance, market conditions are favorable. But whether someone is buying or staying put, today’s conditions spotlight a once-fundamental truth about homeownership: it’s an investment.

“I think the crash has taken the consumer back to the idea that the home is an investment, and not something that can earn a quick dollar,” DuCharme says. “I think over the past few years, with all the changes in the mortgages that were available to consumers, we lost our focus. I think the impact to the mortgage industry is that we’re getting back to what we once believed.”

Even with prices and inventory where they are today, Sisto remains confident that homes will gain value over time. Just consider a home purchased 30 years ago, at the height of interest rates.

“I would guarantee you that if someone bought a house then, even with prices depressed today, it’s still worth more today than it was in 1981,” Sisto says. “Even though your values went up between the ’80s and 2007, and now they’ve gone down a little, they’ve stabilized. The difference in value is still big. You hear people say today that their house isn’t worth as much as their mortgage. Well, that’s because they bought it in 2006. They started at a peak in this 30-year cycle.”

But, as Shield points out, part of the challenge in home values lies in appraisals, a process that’s changed much in the wake of the housing collapse. Today, appraisers are reluctant to add value, and are more likely to undervalue a home. When a home is undervalued, or compared with a neighborhood foreclosure, that starts a negative trend.

“Suppose you’re selling me your home, and the appraisal came in low,” Shield says. “I come back in and ask you to drop the value of your home, to match up with the appraisal I got. When we close, and I buy your house, that price becomes the comparison for the next person who wants to buy in your neighborhood. In many ways, the stringent appraisal environment we’re in is causing values to drop.”

Until the market stabilizes, values will continue to struggle, Shield says.

Ups and Downs

Interest rates are likely to remain low for some time. For better or for worse, it’s a buyer’s market.

It’s such a buyer’s market that Mini has clients who are on rate watch. “I’m not psychic, but I don’t think prices are going to go down,” Mini says. “I certainly doubt they’re going to go up much in the next six months to a year. There’s an old adage of buy low and sell high. So buy low right now if you can.”

Home State’s Slack isn’t convinced that a rate watch is necessary. This is as good as it gets, he says.
“I believe rates are going to bump along the bottom,” Slack says. “We’ve hit the bottom already, I believe, and it’s going to bump along the bottom for a while.”

Ann Chapple, a CPA, and DuCharme, her mortgage broker, are watching rates like a hawk and they’ve pounced at several opportunities. Her last refinance, in 2009, yielded a 4.25 percent interest rate on a 20-year mortgage. Two years before that, it was higher. But by press time, she and her husband were about to close on a 15-year mortgage at just 3.25 percent.

“That’s awesome,” Ann says. “We’re very happy with that. We waited and watched the markets. We had that number in mind, and we just waited it out.”

With two children, ages 10 and 11, the Chapples plan to stay put awhile. They’re investing in this home, creating a nest egg and seizing opportunity.

“We’re in a house and a community that we really like, and the kids love their schools,” Ann says. “We want to stay put for awhile.” ❚