A small bank in the Pacific Northwest is hoping to boost sales for builders who owe the bank millions by offering mortgages to new homebuyers at less than 4 percent interest.

Banner Bank began offering the low rates through a subsidiary on March 7 in Portland, Ore., and surrounding markets, and plans to expand the program next month to Seattle and Spokane, Wash., and Boise, Idaho.

A small bank in the Pacific Northwest is hoping to boost sales for builders who owe the bank millions by offering mortgages to new homebuyers at less than 4 percent interest.

Banner Bank began offering the low rates through a subsidiary on March 7 in Portland, Ore., and surrounding markets, and plans to expand the program next month to Seattle and Spokane, Wash., and Boise, Idaho.

In announcing the "Great Northwest Home Rush" program, Banner subsidiary Community Financial Corp. said borrowers with good credit and 20 percent down payments could qualify for 30-year fixed-rate loans with a "note rate" of as low as 3.875 percent.

That translates into a 3.973 percent annual percentage rate, or APR, when the best rate available from most lenders is closer to 5 percent. Even prospective homebuyers bringing no money to the table could obtain 4.875 percent fixed-rate loans, the bank said.

The catch is that the loans are available only for properties purchased from a list of several hundred homes and lots developed by about 75 builders who have millions in outstanding loans with Banner. The list includes homes and lots in Redmond and Vancouver, Wash., and several cities in Oregon including Beaverton, Bend and Portland.

As many as $50 million in low-interest loans will be made in the Portland area through March 22, said Ken Larsen, Banner’s senior vice president, real estate lending.

"We’ve had pretty nice success with it in Portland," Larsen said, selling 30 of 300 available homes on the first day. "We want to reach out to people who are sitting on the fence and waiting for the bottom, and help them out. Noboby will know where the bottom is until two months later."

Banner’s program is not unlike a proposal put forward by building industry groups that the government subsidize mortgage rates for all qualified borrowers.

The National Association of Home Builders and other members of a "Fix Housing First Alliance" group had hoped the $787 billion stimulus bill signed into law on Feb. 17 would bring 30-year fixed-rate mortgages down to 2.99 percent on sales closed by June 30, and to 3.99 percent on closings between June 30 and Dec. 31 (see story).

The National Association of Realtors, which supports a temporary government interest-rate buy-down program, has estimated that a 1 percent reduction in mortgage interest rates boosts buying power by 10 percent and can generate 500,000 or more sales.

Although the Federal Reserve is purchasing billions of mortgage-backed securities issued by Fannie Mae and Freddie Mac — a move that’s credited with bringing rates on conventional, conforming loans to near-historic lows of around 5 percent — the stimulus bill did not include the interest-rate subsidy program advocated by the industry. …CONTINUED

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 ForeclosureRadar.com, 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

According to a regulatory filing, Banner cut back construction and land development loan originations by 36 percent in 2007, to $855 million, and made even more drastic cutbacks in 2008. By the end of last year, Banner said it had reduced the outstanding balance of one- to four-family residential construction loans by $233.9 million, down from a peak of $655 million in the summer of 2007.

Nevertheless, at the end of September, two dozen developers who owed Banner Bank more than $1 million each had stopped making payments on their debts, the company said.

Among those defaulting on their loans were a developer with 196 unfinished lots in a subdivision near Seattle, who owed $18 million, and the builder of a partially completed, 49-home subdivision in "a desirable suburban location" near Portland who owed $11 million.

Banner has also been forced to take back more and more of the property put up as collateral by developers. The $10 million in real estate-owned property on Banner’s books at the end of September included a subdivision with a book value of $4.5 million "secured by 74 fully developed and marketable single-family building lots" in Salem, Ore.

By the end of the year, the dollar value of REO inventory and repossessed assets on Banner’s books had more than doubled, to $21.9 million, the company said.

With new-home construction in many regions having essentially ground to a halt, there will inevitably be a shortage of new homes once a recovery sets in because there will be a lag before builders can catch up with demand, Larsen said.

"Nobody is building new homes right now, and once these are gone, they’re gone," he said.

Banner’s low rates have caught the interest of the news media, including columnist Laura Rowley, who called the incentive program "a model of how the Troubled Asset Relief Program is supposed to work," in her "Money & Happiness" column published by Yahoo! Finance.

Larsen said the attention the program has received is not unwelcome, but comes as something of a surprise, given that many builders offer incentives to buyers. It may be that the program is easier for consumers to grasp than seller contributions or interest-rate buy-downs, he said.

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