In the middle of a credit crunch, there's a mortgage boom going on.

Overall lending is down, as banks have tightened their purse strings. But demand for mortgages is as strong as ever, driven by some of the lowest interest rates on record and housing prices driven into the ground by the foreclosure crises. But many potential borrowers have been unable to climb aboard the bargain bus, due to tightening credit restrictions by major lenders in the wake of the foreclosure crises.

For some of them, community banks and other small lenders may provide an attractive option. These lenders often have more flexibility than the megabanks and are willing to work with borrowers with blemished or otherwise less-than-perfect credit.

"Actually, small banks and community banks have always had more flexibility," said Richard Belling, a semiretired mortgage consultant and former president/CEO of Community Financial Group Mortgage in Grafton, Wis. "Small banks and community banks are a lot closer to the customer and are more willing to work with customers who may have had issues and help them become homeowners."

Belling said one of the advantages of smaller banks is that they don't take a "cookie cutter" approach to assessing potential borrowers, unlike the more inflexible criteria larger lenders typically use to determine who does and does not qualify for a mortgage.

Good people with bad credit

He said that in some cases, people may have bad credit due to a one-time financial crisis - a divorce, medical emergency, over-extension of credit - that doesn't necessarily affect their ability to pay off a mortgage. Belling cited as an example a widow whose husband owned a business that went bankrupt after he died. Her credit was ruined, despite the fact she had a good income of her own and could put 40 percent down on the home she wanted to buy.

"In that case, there was absolutely no reason to deny that woman a loan, because her late husband's bad credit carried over to her," he said.

Belling, who considers himself a good judge of character, said he's worked with about 5-10 families a year over the past 25 years to help them get loans they might not otherwise qualify for.

"I can tell you now I've never had a foreclosure on any of those loans," he said.

One buyer's experience

Benjamin Goodale, an architect living in Amherst, Mass. was looking to buy a home for his family but faced a number of obstacles. For one, he and his wife were already making mortgage payments on a rental duplex they owned, which tied up a big chunk of their credit. For another, the home they were looking at was part of a co-housing community, a type of condominium development with communal overtones, such as a common house where some meals are shared.

Goodale said he applied to and was pre-approved by one of the major lenders, and that everything was. was fine until the lender's appraiser took a look at the property.

"They called me back and said they wouldn't be able to lend because the appraiser said it was a co-housing development," he said

Goodale said he was a bit peeved by the news, because he'd paid an application fee and told the lender all along that he was looking at a co-housing development. At the suggestion of a friend, he applied to the UMassFive College Federal Credit Union.

Manager makes the difference

The credit union was ok with the property being a co-housing development, but Goodale's mortgage on the rental property meant his debt-to-income ratio was too high to qualify for another mortgage. So the loan officer went and got a manager who, after meeting with Goodale, went ahead and approved the mortgage.

Goodale and his wife closed March 14 on a 1,275-square foot unit for $252,800.They even saved money over what the big lender was going to charge.

"The credit union ended up being a slightly lower rate and the points were lower," he said.

Knowing the community is key

Representatives of small lenders say that one of their big advantages is that they know their communities and their customers. Mark Pinsky, President/CEO of Opportunity Finance Network, a national network of community development financial institutions, said his company has been able to do multigenerational lending to extended families living under one roof because they recognize the cultural differences that make this a normal and stable arrangement for some groups. A traditional lender, he said, might not be able to do that.

"We're in the business of understanding what our customers need and we try to be flexible," Pinsky said. "I think these days, everyone has to be flexible."

Remained solid during financial meltdown

One of the other factors working in favor of small lenders these days is that many of them have healthier balance sheets than the megabanks, because they were less likely to get involved in the risky loans and exotic financial instruments that led to last fall's financial meltdown.

"The important thing from our perspective is, our mortgage portfolios have been quite healthy," Pinsky said. "There's not a great magic to it. We think the key to what we do is we know our borrowers and we're conservative in how we appraise assets."

Dave Petro, president/CEO of ICBA Mortgage, a subsidiary of the Independent Community Bankers of America, said that despite the financial crisis, things have been going very well for community banks in general.

"I can tell you that for a lot of banks that use our program, their numbers are up very significantly over the last 24 months," he said.

An ongoing relationship with customers

Petro said community banks succeed by establishing an ongoing relationship with their customers.

"That's probably where their checking account is, that's probably where the savings account is, that probably where the car loan is - it's a long-term relationship," he said.

"Community banks have always looked at the long-term relationship with the customer, so they don't compete for those exotic products" Petro said. "They stick with the plain vanilla products."

Helping people get out from under a high-cost mortgage can also be part of building that relationship. Opportunity Finance Network's Pinsky said his company has also done a lot of refinancing to help people get out of bad loans.

"A loan that's going to cause someone to lose their home is not a good loan," he said. "Our experience is that people underwater (owe more than their home is worth due to declining housing prices) continue to pay."

"Ninety-five percent of the people just want to succeed."

Published on April 22, 2009