The state's legislature is close to giving the state-owned Bank of North Dakota authority to originate and service millions of dollars in residential mortgage loans on behalf of small banks and credit unions. Many banks in rural North Dakota have all but stopped making mortgages because of high regulatory costs.
Bank of North Dakota's program would let community banks keep a toehold in lending for new home purchases, a lending category that is projected to rise.
While the arrangement could prove helpful to North Dakota's banks, other states have the same problem: rural banks can't justify the costs of originating and servicing mortgages for home purchases. For instance, South Dakota bankers have brainstormed how to tackle the issue but have yet to find a solution, says Curt Everson, president of the South Dakota Bankers Association.
"We've got to come up with some other model," Everson says. "You're not going to build a Bank of North Dakota-like institution in our state, simply around a few million dollars' worth of rural home loans, because the economies of scale won't work."
Small banks want to offer mortgages to avoid losing customers to bigger rivals, says Bob Humann, chief lending officer at Bank of North Dakota. "Bankers don't want to lose the whole relationship" with a customer because of an inability to originate a mortgage, he says.
Loans for home purchases—not refinancing—should provide a way to grow. The Mortgage Bankers Association forecasts a 45% increase in mortgage originations for the purchase of one-to-four family residences from last year's fourth quarter to the fourth quarter of 2014, to $178 billion.
Under North Dakota's proposed program, small banks would refer home loan originations to the state-owned bank. The banks would not receive referral fees, but they would receive a reimbursement for the referral's processing cost, Humann says. The incentive for smaller banks is the ability to maintain customer relationships, he says.
Community banks in rural North Dakota never relied too much on home lending, with many issuing just a handful new-purchase mortgages each year, Humann says.
New regulations, including ability-to-repay rules and qualified mortgage standards, have priced small banks out of making home loans, says Rick Clayburgh, president and chief executive of the North Dakota Bankers Association.
Regulation has "made it impossible to write residential home loans in rural parts of the state," he says.
In many states, including North Dakota, appraisals are also an issue in rural areas. There are typically so few home sales in parts of rural Georgia that it's tough for appraisers to generate comparable sales to calculate accurate value estimates, says David Oliver, a spokesman for the Georgia Bankers Association. With comps fewer, it is more difficult to lend.
The lengthy period of low interest rates has also reduced the supply of appraisal firms in rural areas, because of the high amount of refinancing work, Everson says. Appraisers don't need to drive hundreds of miles to rural areas when they can stay in metropolitan areas where there is plenty of work, he says.
Fewer appraisals make it difficult for small banks to sell the loans they make, and most banks don't want to hang on to those loans. "Most community banks are not prepared to deal with 30 years of interest rate risk," Everson says.
Lawmakers gave Bank of North Dakota provisional authority in 2011 to originate and service home loans, as part of a test project, Humann says. The bank has generated 13 loans totaling $1.4 million, and it has another 15 loans totaling $1.7 million in the application process. Pending legislation would remove a cap that limits the bank to $8 million of home loans annually.
The bill would also let Bank of North Dakota set its own maximum amount per loan; it is currently set at $200,000 per loan. Credit unions would also be allowed to participate under the new proposal.
Bank of North Dakota has plenty of money to lend, Humann says. Fueled by a massive oil boom in the western part of the state, the bank's assets totaled $5.9 billion at Sept. 30, rising 44% from a year earlier. Most of its deposits come from state agencies.
The North Dakota Senate passed the bill on Jan. 22; it is pending in the state's House of Representatives. The bill also requires approval from Gov. Jack Dalrymple. Calls to Dalrymple's office were not returned.