Local Lenders Help Avoid Foreclosure


NEW YORK (MainStreet) — Low-income mortgage holders got the short end of the stick in the housing crisis. There was one exception though – homeowners who got their loans from local lenders stood a better chance of keeping their homes.

That’s the premise of a new study from the John Glenn School of Public Affairs at Ohio State University. Stephanie Moulton, assistant professor of public affairs, and her team found that low-income homeowners who got mortgages from a local institution were better able to avoid foreclosure or default on their loans.

The study looks at two similar homeowners with the same incomes and the same mortgage rates; the owner who got a mortgage from a local lender was less likely to default on the loan.

“The door you walk into when you’re looking for a loan matters a lot,” says Moulton. “Local banks seem to offer some protection to homebuyers, particularly those with low incomes who may be seen as risky borrowers.”

Using Mortgage Revenue Bond (MRB) loan programs, implemented by two states – Indiana (5,000 homeowners) and Ohio (20,000 homeowners) – as a barometer, Moulton found that program participants were far less likely to get into trouble with their home mortgages. Only 9% of MRB borrowers were 60 or more days late on their monthly mortgage payments, while 37% of borrowers with outside lenders were late over the same time period.

The MRB program, designed to aid lower-income consumers gain a home loan, offers loan help from all kinds of mortgage lenders. “I was trying to find out why there was such a wide variation in default rates, even though they were all offering the same loan product,” Moulton said.

Data from her work in both states showed that even high-risk borrowers – defined as borrowers with a credit score of 660 or less – were less apt to default if their mortgage loan was managed by a local lender.

So what makes a local bank or lender a better mortgage bet for low-income homeowners?

It all comes down to hands-on customer service support, which is a hallmark of smaller, local banks, and the criteria that small lenders use when deciding on a home loan. Moulton says that bigger banks, and even smaller banks that are 10 miles away from the borrower’s residence, tend to give greater weight to things like credit scores. Local banks take other factors into consideration, such as how long the borrower has worked at his or her job, and whether the person contributes regularly to a savings account.

“This kind of information may give a more complete picture of whether a person can really afford a mortgage, particularly for higher-risk borrowers,” Moulton says. “Some of the local bankers told me they won’t even look at a credit score until they have talked to an individual and determined if they think he or she can make the payments.”

In addition, local bankers are more likely to have a continuing relationship with the borrower, through the checking and savings accounts held by the customer.

“If there’s a relationship, the borrower may feel more obligated to make their payments. And the banks may provide more education and information to the borrowers, equipping them to be better homeowners,” she adds.

So if you want a better shot at a mortgage you know you can pay, even though banks outside of your community doubt that you can, turn to a local lender. If Moulton’s right, it’s a good path to a solid home mortgage experience.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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