Single-Family Mortgage Lending. A significant lending activity has been the origination
of permanent conventional mortgage loans secured by single-family residences located
within and outside of our primary market area. Loan originations are primarily
obtained from our loan officers and their contacts within the local real estate
industry and with existing or past customers and members of the local communities.
We offer both fixed-rate and adjustable-rate mortgage (ARM) loans with maturities
generally up to 30 years, priced competitively with current market rates. We offer
several ARM loan programs with terms of up to 30 years and interest rates that
adjust with a maximum adjustment limitation of 2.0% per year and a 6.0% lifetime
cap. The interest rate adjustments on ARM loans currently offered are indexed
to a variety of established indices and these loans do not provide for initial
deep discount interest rates. We do not originate option ARM loans or loans with
negative amortization.
The volume and types of single-family ARM loan originations are affected by
market factors such as the level of interest rates, consumer preferences, competition
and the availability of funds. In recent years, demand for single-family ARM
loans has been weak due to consumer preference for fixed-rate loans as a result
of the low interest rate environment. Consequently, our origination of ARM loans
on single-family residential properties has not been significant as compared
to our origination of fixed-rate loans.
We currently sell the majority of the single-family mortgage loans that we
originate on a servicing released basis. All single-family mortgage loans sold
are underwritten according to Federal Home Loan Mortgage Corporation (Freddie
Mac) or Federal National Mortgage Association (Fannie Mae) guidelines, or are
underwritten to comply with additional guidelines as may be required by the
individual investor. CFBank is a direct endorsed underwriter, a designation
by the Department of Housing and Urban Development that allows us to offer loans
insured by the Federal Housing Authority (FHA).
Our policy is to originate single-family residential mortgage loans for portfolio
in amounts up to 85% of the lower of the appraised value or the purchase price
of the property securing the loan, without requiring private mortgage insurance.
Loans in excess of 85% of the lower of the appraised value or purchase price
of the property securing the loan require private mortgage insurance. Mortgage
loans generally include due-on-sale clauses which provide us with the contractual
right to deem the loan immediately due and payable in the event the borrower
transfers ownership of the property without our consent.
Portfolio single-family ARM loans, generally pose credit risks not inherent
in fixed-rate loans, primarily because as interest rates rise, the borrowers’
payments rise, increasing the potential for default. Periodic and lifetime caps
on interest rate increases help to reduce the credit risks associated with ARM
loans, but also limit the interest rate sensitivity of such loans.
CFBank has participated in a Mortgage Purchase Program with Northpointe Bank
(Northpointe), a Michigan banking corporation, since December 2012. Pursuant
to the terms of a participation agreement, CFBank purchases participation interests
in loans made by Northpointe related to fully underwritten and pre-sold mortgage
loans originated by various prescreened mortgage brokers located throughout
the U.S. The underlying loans are individually (MERS) registered loans which
are held until funded by the end investor. The mortgage loan investors include
Fannie Mae and Freddie Mac, and other major financial institutions such as Wells
Fargo Bank. This process on average takes approximately 14 days. Given the short-term
holding period of the underlying loans, common credit risks (such as past due,
impairment and TDR, nonperforming, and nonaccrual classification) are substantially
reduced. Therefore, no allowance is allocated by CFBank to these loans. These
purchased loans are classified as portfolio loans.
Commercial Real Estate and Multi-Family Residential Mortgage Lending. Origination
of commercial real estate and multi-family residential mortgage loans continues
to be a significant portion of CFBank’s lending activity.
We originate commercial real estate loans that are secured by properties used
for business purposes, such as manufacturing facilities, office buildings or
retail facilities. We originate multi-family residential mortgage loans that
are secured by apartment buildings, condominiums, and multi-family residential
houses. Commercial real estate and multi-family residential mortgage loans are
secured by properties generally located in our primary market area.
Commercial real estate and multi-family residential mortgage loans are generally
considered to involve a greater degree of risk than single-family residential
mortgage loans. Because payments on loans secured by commercial real estate
and multi-family residential properties are dependent on successful operation
or management of the properties, repayment of commercial real estate and multi-family
residential mortgage loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. As with single-family residential
mortgage loans, adjustable rate commercial real estate and multi-family residential
mortgage loans generally pose credit risks not inherent in fixed-rate loans,
primarily because as interest rates rise, the borrowers’ payments rise,
increasing the potential for default. Additionally, adjustable rate commercial
real estate and multi-family residential mortgage loans generally do not contain
periodic and lifetime caps on interest rate changes. We seek to minimize the
additional risk presented by adjustable rate commercial real estate and multi-family
residential mortgage loans through underwriting criteria that require such loans
to be qualified at origination with sufficient debt coverage ratios under increasing
interest rate scenarios.
Commercial Lending. The origination of commercial loans continues to be a significant
component of our lending activity. During 2015, commercial lending activity
decreased by $2.8 million, or 6.0%, to $43.7 million at year-end 2015. We originate
commercial loans primarily to businesses located within our primary market area.
Commercial loans are generally secured by business equipment, inventory, accounts
receivable and other business assets. In underwriting commercial loans, we consider
the net operating income of the company, the debt service ratio and the financial
strength, expertise and credit history of the business owners and/or guarantors.
We offer both fixed and adjustable rate commercial loans. Fixed-rate loans are
generally limited to a maximum term of five years. Adjustable-rate loans are
tied to various market indices and generally adjust monthly or annually.
Commercial loans are generally considered to involve a greater degree of risk
than loans secured by real estate. Because payments on commercial loans are
dependent on successful operation of the business enterprise, repayment of such
loans may be subject to a greater extent to adverse conditions in the economy.
We seek to mitigate these risks through underwriting policies which require
such loans to be qualified at origination on the basis of the enterprise’s
income and debt coverage ratio and the financial strength of the business owners
and/or guarantors.
Adjustable-rate commercial loans generally pose credit risks not inherent in
fixed-rate loans, primarily because as interest rates rise, the borrowers’
payments rise, increasing the potential for default. Additionally, adjustable-rate
commercial loans generally do not contain periodic and lifetime caps on interest
rate changes. We seek to minimize the additional risk presented by adjustable-rate
commercial loans through underwriting criteria that require such loans to be
qualified at origination with sufficient debt coverage ratios under increasing
interest rate scenarios.
Construction and Land Lending. With some economic improvement in our market
areas, there was also an increase in commercial building activity.
Construction loans are made to finance the construction of residential and
commercial properties generally located within our primary market area. Construction
loans are fixed- or adjustable-rate loans which may convert to permanent loans
with maturities of up to 30 years. Our policies provide that construction loans
may be made in amounts up to 80% of the appraised value of the property, and
an independent appraisal of the property is required. Loan proceeds are disbursed
in increments as construction progresses and as inspections warrant and regular
inspections are required to monitor the progress of construction. Land development
loans generally do not exceed 75% of the actual cost or current appraised value
of the property, whichever is less. Loans on raw land generally do not exceed
65% of the actual cost or current appraised value of the property, whichever
is less.