Citizens National Bank is mapping new pricing strategies in Houston making home loans to customers most banks won't touch.

The $41 million-asset bank reaps 11% to 13% yields on $20,000 to $30,000 mortgage loans to borrowers who don't have the traditional credit histories or incomes that qualify them for loan products elsewhere.

By going into the business, Citizens National has achieved one of the strongest performances in the country, reporting a first-quarter return on assets of 3.49%, said Mike Carr, executive vice president.Citizens National BankAt a Glance Headquarters HoustonCEO Jim P. MeadowsEstablished 1979Assets $41 millionROA 3.49%ROE 47.0%Loan-to-deposit ratio 92.4%Employees 35Source: Citizens National Bank

The bank initiated this lending practice about six years ago, after Houston's real estate market collapsed and sent home prices plunging. Subsequently, people who previously were denied access to the housing market were able to consider buying a home.

Typical Borrower

However, "They couldn't find anybody to loan them the money," Mr. Carr said.

Today, the loans make up about 75% of Citizens National's portfolio, and loans more than 30 days delinquent are less than one half of 1%, Mr. Carr said.

The typical borrower is a blue-collar worker who earns $10,000 to $12,000 a year and wants to buy a $25,000 to $30,000 home, Mr. Carr said. However, he or she lacks a standard credit history. So, the bank examines less conventional measures, such as payment histories from utility companies or landlords.

Because of its higher rates, it's possible that some people or groups could accuse the bank of price gouging, said David C. Cates, who directs the Cates Bank Rating Service as a consultant to Thomson Bank Watch.

However, "They justify it on the grounds that there's a lot of hand holding and credit checking," Mr. Cates said. "If it takes a 13% or a 15% yield to someone who's willing to pay it, that's economically constructive, because some people [lenders] wouldn't loan at all."

Mr. Carr said that no one has complained to the bank about price gouging. The loans are "priced for risk and servicing," he said. "We feel that we're doing a service. We feel pretty good about it."

As for examiners, "They love it," Mr. Carr said. His philosophy is that it's not bad for a bank to make money on community reinvestment as long as it puts money into the community, he said.

Since Citizens National began building its mortgage portfolio, return on assets has progressed steadily upward from 1.38% in 1989 to 3.35% last year.

'Not Easy to Service'

Mr. Cates said that if the nature of this loan pricing doesn't disturb regulators and community groups, "Why shouldn't this emerge as an accepted form of pricing?"

Mr. Carr, who said that a couple other Houston banks have begun doing similar lending in recent years, agreed that more community banks could implement this strategy if they are willing to put forth the effort.

"These loans are not easy to service," he said. "We spend a lot of time making loans."

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