Residential Real Estate Mortgage Loans. The Association’s primary lending
activity is the origination of residential real estate mortgage loans.
The Association generally originates both fixed- and adjustable-rate mortgage
loans in amounts up to the maximum conforming loan limits as established by
the Office of Federal Housing Enterprise Oversight, which is currently $417,000
and $625,500, respectively, for single-family homes in most of our lending markets.
The Association also originates loans in amounts that exceed the lending limit
for conforming loans, which the Association refers to as “jumbo loans.”
The Association generally underwrites jumbo loans in a manner similar to conforming
loans. Jumbo loans are not uncommon in the Association’s market areas.
Home Equity Loans and Home Equity Lines of Credit. The Association offers home
equity loans and home equity lines of credit, which are primarily secured by
a second mortgage on residences. The array of home equity products offered by
the Association varied significantly between June 28, 2010 and September 30,
2015. Prior to June 28, 2010, the Association offered home equity loans and
home equity lines of credit. The Association also offered a home equity lending
product that was secured by a third mortgage, although the Association only
originated this loan to borrowers where the Association also held the second
mortgage. Between June 28, 2010 and March 19, 2012, we suspended the acceptance
of new home equity credit applications with the exception of bridge loans (loans
where borrowers can utilize the existing equity in their current home to fund
the purchase of a new home before they have sold their current home) and, in
accordance with a reduction plan that was accepted by our primary federal banking
regulator in December 2010, we actively pursued strategies to decrease the outstanding
balance of our home equity lending portfolio as well as our exposure to undrawn
home equity lines of credit. During the quarter ended June 30, 2011, we achieved
the balance and exposure reduction targets included in the home equity lending
reduction plan. Beginning March 20, 2012, we again offered new home equity lines
of credit to qualifying existing home equity customers. In February 2013, we
further modified the product design and in April 2013 we extended the offer
to both existing home equity customers and new consumers in Ohio, Florida and
selected counties in Kentucky. Over the course of the fiscal year ended September
30, 2014, we expanded the home equity product offering to now include 21 states
and the District of Columbia. These offers were, and are, subject to certain
property and credit performance conditions which, among other items, related
to CLTV, geography, borrower income verification, minimum credit scores and
draw period duration.
Construction Loans. The Association originates construction loans to individuals
for the construction of their personal single-family residence by a qualified
builder (construction/permanent loans). The Association’s construction/permanent
loans generally provide for disbursements to the builder or sub-contractors
during the construction phase as work progresses. During the construction phase,
the borrower only pays interest on the drawn balance. Upon completion of construction,
the loan converts to a permanent amortizing loan without the expense of a second
closing. The Association offers construction/permanent loans with fixed or adjustable
rates, and a current maximum loan-to-completed-appraised value ratio of 80%.
Construction financing generally involves greater credit risk than long-term
financing on improved, owner-occupied real estate. Risk of loss on a construction
loan depends largely upon the accuracy of the initial estimate of the value
of the property at completion of construction compared to the estimated cost
(including interest) of construction and other assumptions. If the estimate
of construction cost proves to be inaccurate, the Association may be required
to advance additional funds beyond the amount originally committed in order
to protect the value of the property. Moreover, if the estimated value of the
completed project proves to be inaccurate, the borrower may hold a property
with a value that is insufficient to assure full repayment of the construction
loan upon the sale of the property. This is more likely to occur when home prices
are falling.