Study Finds Majority of Massachusetts Home Loans Originate Out of State

The Boston Globe reports that in the past two decades, out-of-state companies have become the dominant source of mortgage loans for Massachusetts buyers, eclipsing local banks and helping to usher in an array of exotic mortgage loans.

According to the Massachusetts Community & Banking Council, a group of nonprofit housing agencies and lenders, independent mortgage companies and out-of-state banking companies made 78 percent of 2004 home loans in Boston. In contrast, banks and credit unions with branches in Massachusetts were responsible for just 22 percent of mortgages. It marks quite the reversal from 1990, when Massachusetts banks had 78 percent of the market. A similar pattern developed statewide, with 74 percent of mortgages (excluding refinancings) in 2004 coming from outside lenders.

”There’s been this dramatic transformation of the mortgage industry. There used to be four big Boston banks. Now they’ve all turned into one big Boston bank, and each of those mergers resulted in less local lending,” said James Campen, Emeritus Professor of Economics and Research Associate for the Mauricio Gaston Institute at the University of Massachusetts at Boston.

Indeed, Bank of America, the area’s biggest lender, and which acquired FleetBoston Financial in 2004, is considered a local bank in the study. The rise of out-of-state lenders is being fueled in large part by soaring real estate prices, experts say. Because they are not subject to federal community banking laws when operating in Massachusetts, out-of-state lenders aggressively market interest-only loans that make it easier for working people to buy a home.

• A KEY STATISTIC: One-fourth of the growth in market share captured by out-of-state financial companies has been in the ‘’subprime” market, the study found. Subprime lending involves above-average interest rates and higher fees to compensate for the risk of lending to customers with lower credit than ”prime” customers with optimal credit.

What happens is buyers are increasingly enticed by anything that will get a little taken off the monthly payment, even to the point where they will trust their lenders to a fault and not fully understand the loans they’re dealing with.

”Does every product work for every person? It doesn’t. But if some didn’t have access to a variety of lending programs, their alternative might be that they go into foreclosure or they don’t get the loan to begin with,” said Kevin Cuff, president of the Massachusetts Mortgage Bankers Association. “The shift has created new products that benefit consumers by giving them options.”

Changes in mortgage lending are playing out nationwide as large U.S. banks merge, allowing aggressive out-of-state mortgage companies to rush in and fill a void, offering buyers lower rates or more appealing loans. Other factors are technological advances and the rise of the investment loan market. No longer is it necessary, or even a buyer’s first instinct, to have the loan originated locally.

For instance, a Florida home loan company might arrange a purchase for a Massachusetts resident and place it with a California financial institution, which could then in turn sell the loan to an investor.

The study defined ”in-state” banks as those with branches in Massachusetts, including North Carolina-based Bank of America and Pennsylvania-based Sovereign Bank. They are more heavily regulated than independent companies, out-of-state banking companies, and nonbank subsidiaries. Nine of the state’s top lenders, including Countrywide Financial and Wells Fargo, are not subject to the Massachusetts banking regulations.

In the case of South Florida real estate, where working-class residents are having an equally tough time finding affordable housing, one expects a similar increase in out-of-state lending. Certainly, the number of interest-only and adjustable-rate Florida home loans has risen greatly in recent years, as rates have been low and median prices have skyrocketed. How the many factors involved in the housing market play out in 2006 remains to be seen.