A Creative Use of TARP Funds

February 24, 2009

Authored by: Robert Klingler

While many community banks still have not received any TARP Capital investment, many of those that have may be able to demonstrate to Congress why investments in community banks are key to getting money circulating on main street again.  One such community bank, Citizens South Bank in Gastonia, North Carolina, and its President, Kim Price, were highlighted in a recent opinion piece in the Washington Post.

And that got Price to thinking: What if Citizens were to use its federal bailout money to offer below-market mortgage rates with no closing costs to consumers who would buy a house, or a house lot, from builders and developers who had borrowed money from Citizens?

Price asked some of his loan officers to check with the builders and developers, who not surprisingly were excited enough about the project to be willing to chip in some money to help cover a portion of the forgone closing costs.  So last week, Citizens launched its marketing campaign for the $20.5 million program, in collaboration with its builder-developer customers, offering 30-year loans with an initial teaser rate of 3.5 percent for the first two years, rising to a fixed 5.5 percent rate (the current market rate) for the balance of the loan.

“As we see it, it’s a win-win-win situation all round,” Price explained to me. The builders and developers win by having a tool to help move their unsold inventory.  The consumer wins by getting a cut-rate loan.  And Citizens wins because it lowers the risk that it will have to write off even more of its commercial loans while taking a modest step to help stimulate the local economy.  And, of course, the public relations bump isn’t bad either.

Offering special mortgage rates to consumers who buy lots from the bank’s builders can be a great way to address the slowing real estate market generally, with or without TARP Capital.