Vermont's traditions of community banking and Yankee frugality appear to have helped insulate the state from the subprime lending crisis rocking housing markets in many parts of the country.
"We have conservative people in Vermont in that they tend to be careful with their finances," says Deputy Banking Commissioner Thomas Candon.
He cites Mortgage Bankers Association surveys showing that Vermont has the lowest rate of loan delinquencies and housing foreclosures in New England. Vermont also records the region's smallest proportion of loans categorized as subprime - a term referring to credit given to borrowers with sketchy financial histories, potentially including personal bankruptcy.
By contrast with Vermont, many states have seen a great rise in subprime mortgage lending in recent years. As housing markets grew hotter and hotter, "these lenders relaxed their standards and gave mortgages at higher rates to people with incomes and credit histories that would normally have disqualified them," Candon explains.
Several mortgage firms catering to subprime borrowers have themselves gone bankrupt, including a couple that operated in Vermont. They were rendered insolvent by growing rates of default on the part of borrowers in areas where real estate values have fallen. And in some cases, these debtors claim to have been the victims of predatory practices, such as misleading explanations of loan terms.
The results have been instability in the mortgage industry and restricted access to credit for many would-be borrowers. Vermont, however, has managed to sidestep the worst of the problems. Candon notes, for example, that only $98,000 in administrative penalties were assessed last year against lenders operating in Vermont. That's a proportionately low figure in comparison with the sum of fines levied in other states for unscrupulous lending practices, Candon says.
The number of Vermonters filing written complaints related to loans or deposits has dropped sharply in recent years - from 307 in 2004 to 163 last year. Candon cautions, however, that "We are finding a bit of an uptick in the first quarter of this year."
"One reason you don't see a significant amount of subprime lending in Vermont is that a lot of people still borrow locally," says Kerry York, director of the Consumers Credit Counseling Service of New Hampshire and Vermont. "And local banks in Vermont don't get into subprime lending."
Vermont Bankers Association President Chris D'Elia agrees that his member institutions' generally strong presence in the community has helped the state avoid the national upsurge in foreclosures on properties with subprime mortgages. "You go into the local bank, and people usually know who you are," D'Elia says. "They're going to try to help you."
Noting that his association represents all 23 banks doing business in Vermont, D'Elia says none of them engage in the riskiest forms of subprime lending. All abide by state laws requiring full disclosure of loan terms to potential borrowers, he adds. Vermont banks specify to their customers the maximum monthly payments they must eventually make on mortgages that initially have lower interest rates - known as "teasers."
But more than 1000 licensed lenders operate in Vermont, and some do make risky loans to local subprime borrowers. Almost all of these companies are headquartered out of state, including Connecticut-based MLN, which recently declared bankruptcy, and New Century Financial Corporation of Irvine, California, which has announced that it is no longer offering mortgage loans.
About 12 percent of Vermonters holding subprime loans were rated as past due in their payments last year. In the worst cases, involving 0.3 percent of all Vermont borrowers, loans go unpaid for so long that mortgaged properties wind up in foreclosure.
In Chittenden County, for example, about a dozen foreclosures on average take place each month - a rate that has remained steady through the first quarter of this year.
About 150 Vermonters turn annually to the Credit Counseling Service for help with loan troubles, York says. Some of them are subprime borrowers.
"People come in who have difficulty meeting terms because they didn't anticipate the increases they're seeing in monthly payments," York explains. He offers the example of someone who made mortgage payments of $1000 a month for the first two years of a loan, then got whacked by adjusted interest rates requiring an additional $300 or $400 in monthly payments.
York acknowledges that borrowers have a responsibility to understand the terms of debts they incur. "But home ownership is the American Dream," he adds. "Some consumers will hear only what they want to hear."
Suggesting that Vermont does not need to tighten its loan-disclosure requirements, D'Elia says, "You can't protect everybody. The time does come when people need to stand up and take responsibility for making bad decisions."