Industry News, Mortgage, Story

Bank offers home loans below 4%

Program helps indebted builders with low rates for buyers

Some economists and real estate professionals worry that buyer incentives and even some foreclosure-prevention initiatives might unnecessarily prolong the housing downturn by preventing home prices from returning to levels where they are supported by market fundamentals.

Sean O’Toole, chief executive officer of, a company that tracks properties through the foreclosure process in California, said lowering interest rates generally increases prices, as homebuyers buy based on monthly payments rather than price.

"What will happen to prices after the 4 percent deals are gone and someone needs to resell? They’ll drop to prices people can afford at then-current rates, leaving all those folks with 4 percent loans underwater," he said. If lower interest rates mean higher sales prices, that will also mean higher property taxes for homebuyers, O’Toole said.

The low-interest loans Banner is providing consumers will give them more buying power, Larsen said, but he doesn’t see the potential for the program to artificially inflate home prices.

"We just have a small piece of the market, and I’d argue that prices can’t get much lower for the new stuff," Larsen said.

The bank can’t expect to make much, if anything, on the low-interest mortgages themselves. But the loans may help Banner control rising losses in its residential construction and land-loan portfolio because the money it loans to consumers will also come back through the door as debt payments from builders.

"Our intent was to sell our builder inventory and help our builders out," Larsen said. "They’ve got units that, until they sell them, they can’t start on the next one."

Banner never engaged in subprime lending, but did provide construction and land loans to dozens of builders during the boom. The Walla Walla, Wash.-based bank’s publicy traded parent company, Banner Corp., recently reported that it had about $150 million in bad residential construction and related lot and land loans on the books at the end of 2008.

Although one- to four-family construction and land loans represented only 23 percent of Banner’s loan portfolio, they constituted 82 percent of nonperforming assets, bank officials said.

Other banks in the region have had similar problems. Two of Banner Bank’s competitors, Silver Falls Bank and Pinnacle Bank, were closed by Oregon regulators and placed into receivership by the FDIC last month after losses on commercial construction and real estate loans soared.

In January, Banner reported a $78.5 million fourth-quarter loss and a $128 million loss for the year, and the government took a $124 million stake in the company in November through the Troubled Assett Relief Program (TARP). But company officials say they have reduced their exposure to residential construction loans, and that Banner remains well capitalized. …CONTINUED