Editor's note: This is the first in a two-part series examining the effect of the recent subprime loans crisis on the Upper Valley.
With world markets plunging, eminent economists anticipating an economic recession and 2 million people predicted to lose their homes, the current housing crisis has made subprime loans the object of national scrutiny. In the Upper Valley, however, homeowners' reliance on local banks to secure loans has allowed the area to weather the crisis relatively unscathed thus far.
Subprime adjustable rate mortgages, loans given to people who lack adequate credit, have accounted for the largest percentage of home foreclosures in New Hampshire, according to a December report released by the New Hampshire Housing Finance Authority. Such mortgages typically have artificially low interest rates for approximately two or three years, but then reset to a rate above the "prevailing market rate," the report states.
To date, the Upper Valley has experienced few, if any, foreclosures due to failure to pay subprime loans, although an August report from the New Hampshire Bankers Association estimated that 2000 New Hampshire homes will face foreclosure in 2008. Hanover Town Manager Julia Griffin and Lebanon Chief Assessor Dave McMullen both said they were unaware of any residents of their respective towns relocating because of an inability to pay a subprime mortgage.
Upper Valley residents have experienced fewer foreclosures than other residents of the state because they have largely relied on loans from New Hampshire banks, which often use their own financial resources for loans, instead of mortgage brokers, according to Ned Redpath, owner of Coldwell Banker-Redpath & Co., Realtors.
On average, New Hampshire banks have far lower loan delinquency rates than do mortgage lenders and have not made many subprime loans, according to the NHBA report.
While people seeking to move to the Upper Valley may be more likely to look to mortgage brokers for loans, Redpath said, the number of outsiders relocating to the Upper Valley is relatively small due to high housing costs in the area.
As Upper Valley banks often provide their own capital for loans, they suffer when buyers fail to pay their mortgages. Mortgage brokers, on the other hand, suffer no financial losses when a buyer defaults, because they connect prospective buyers with lenders without contributing any of their own money.
"Our position is that [brokers] don't have a lot invested in whether they can make their payment or not, they just act as a middleman," Wells said.
Banks are also more likely than subprime lenders to assist borrowers if they have trouble paying their mortgages, Redpath said, because subprime lenders have little incentive to assist troubled borrowers.
"Subprime lenders are going out like bandits." Redpath said. "They don't care about the borrower. They've already made their money."
Banks have a more long-term relationship with their clients, which could give them an additional incentive to care for their customers, Kenneth Wells, vice president of retail lending & CRA officer of Mascoma Savings Bank, said.
"We want their checking account and their savings account," Wells said. "It's in our best interest to do what's in their best interest."
Wells added that prospective homeowners nationwide are more likely to secure loans from mortgage brokers than from community banks.
"Twenty years ago banks did most of the mortgage lending," Wells said. "That's changed, now two out of three loans are made by mortgage companies or brokers."
Although local banks offer adjustable rate mortgages similar to those offered by brokers, the interest rates on banks' loans rise at a later date, usually five to seven years after the loan is taken out, Wells said. Additionally, the interest rates on such loans are usually capped and do not increase as substantially as subprime loan interest rates.
Nevertheless, the Upper Valley will not fully escape the effects of the subprime crash, as a substantial decrease in local housing prices could potentially increase property taxes for local homeowners. New Hampshire has neither income nor sales tax, so local governments may need to increase property tax rates to compensate for lowered property values in order to generate sufficient revenue.
During the 1989-1990 New Hampshire housing market crash, Griffin, who was then the city manager of Concord, N.H., only collected taxes from 70 percent of her district's residents, forcing the city to borrow money to cover its budget.
"As town manager, I am concerned with staving off tax rate increases that people cannot afford to pay," Griffin said, referring to the current economic crisis. "I am cognizant that people are more likely to be under financial strain than they were this time last year."
The crash may also force towns to postpone upcoming public works projects that would require bonds from the New Hampshire Bond Bank, Griffin said. Towns seek to insure bonds with bond insurance agencies to gain advantageous interest rates from the bank, but these agencies have recently suffered major financial losses following the subprime crash. Without insurance, the bonds' interest rates are higher.
The troubles facing bond insurance agencies, for example, could force Hanover to postpone a wastewater treatment plant project that it had hoped to complete in the 2008-2009 financial year.
"If we determine that this is not the most favorable interest-rate market to participate in, it might well be prudent to wait 12 to 24 months," Griffin wrote in an e-mail to The Dartmouth.
Griffin added that Hanover's postponement of certain projects could hurt the local economy, with the construction industry particularly vulnerable to business losses.
According to economics professor William Fischel, Griffin's analysis of the crisis' ramifications for Hanover likely applies nationwide.
"Higher interest rates and difficulty in borrowing deter private and public investment," Fischel said. "Whether this gently brings us back to normal times or causes a recession is hard to tell."
Although subprime loans have recently come under much scrutiny, they have not always been so heavily criticized; such loans have traditionally allowed low-income families to buy homes for the first time, according to the NHBA report.
"Most people are still making their payments," Wells said. "Not all these loans are a bad idea. The 10 to 15 percent who have not kept up their payments have provided a shock to the system."
