One-to-four Family Residential Lending. Carver Federal originates and purchases
first mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner.
Carver Federal's fixed-rate, one-to-four family residential mortgage loans
are underwritten in accordance with applicable secondary market underwriting
guidelines and requirements for sale. From time to time, the Bank has sold such
loans to Fannie Mae, the State of New York Mortgage Agency (“SONYMA”)
and other third parties. Loans are generally sold with limited recourse on a
servicing retained basis except to SONYMA where the sale is made with servicing
released. Carver Federal uses a servicing firm to sub-service mortgage loans,
whether held in portfolio or sold with servicing retained.
The retention of adjustable-rate loans in Carver Federal's portfolio helps
reduce Carver Federal's exposure to increases in prevailing market interest
rates. However, there are credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable-rate loans.
It is possible that during periods of rising interest rates, the risk of default
on adjustable-rate loans may increase due to increases in interest costs to
borrowers. Although adjustable-rate loans allow the Bank to increase the sensitivity
of its interest-earning assets to changes in interest rates, the extent of this
interest rate sensitivity is limited by periodic and lifetime interest rate
adjustment limitations. Accordingly, there can be no assurance that yields on
the Bank's adjustable-rate loans will fully adjust to compensate for increases
in the Bank's cost of funds. Adjustable-rate loans increase the Bank's exposure
to decreases in prevailing market interest rates, although decreases in the
Bank's cost of funds would tend to offset this effect.
Multifamily Real Estate Lending. Traditionally, Carver Federal originates and
purchases multifamily loans. Multifamily property lending entails additional
risks compared to one-to-four family residential lending. For example, such
loans are dependent on the successful operation of such buildings and can be
significantly impacted by supply and demand conditions in the market for multifamily
residential units.
In making multifamily real estate loans, the Bank primarily considers the property's
ability to generate net operating income sufficient to support the debt service,
the financial resources, income level and managerial expertise of the borrower,
the marketability of the property and the Bank's lending experience with the
borrower. Carver Federal's multifamily real estate product guidelines generally
require that the maximum LTV at origination not exceed 75% based on the appraised
value of the mortgaged property on all such loans. The Bank generally requires
a debt service coverage ratio at origination of at least 1.20 on multifamily
real estate loans, which requires the properties to generate cash flow after
expenses and allowances in excess of the principal and interest payment. Carver
Federal originates and purchases multifamily real estate loans, which are predominantly
adjustable rate loans that generally amortize on the basis of a 15-, 20-, or
25- year period and require a balloon payment after the first five years, or
the borrower may have an option to extend the loan for additional periods. The
Bank occasionally originates fixed rate loans with greater than five year terms.
Personal guarantees may be obtained for additional security from these borrowers.
Commercial Real Estate Lending. Commercial real estate lending consists predominantly
of originating loans for the purpose of purchasing or refinancing office, mixed-use
(properties used for both commercial and residential purposes but predominantly
commercial), retail and church buildings in the Bank's market area. Mixed-use
loans are secured by properties that are intended for both residential and business
use and are classified as commercial real estate. Although Carver has experienced
favorable loss history associated with commercial real estate loans, these loans
may entail additional risks compared with one-to-four family residential and
multifamily lending. For example, such loans typically involve larger loan balances
to single borrowers or groups of related borrowers and the payment experience
on such loans typically is dependent on the successful operation of the commercial
property.
Construction Lending. The Bank has historically originated or participated
in construction loans for new construction and renovation of multifamily buildings,
residential developments, community service facilities, churches, and affordable
housing programs. The Bank's construction loans generally have adjustable interest
rates and are underwritten in accordance with the same standards as the Bank's
mortgage loans on existing properties. The loans provide for disbursement in
stages as construction is completed. Participation in construction loans may
be at various stages of funding. Construction terms are usually from 12 to 24
months. The construction loan interest is capitalized as part of the overall
project cost and is funded monthly from the loan proceeds. Borrowers must satisfy
all credit requirements that apply to the Bank's permanent mortgage loan financing
for the mortgaged property.