Short, sharp fall

Eager to compete in the overheated housing market, Suburban Federal Savings Bank abandoned caution

Getting a mortgage from Suburban Federal Savings Bank couldn't have been much easier for Samuel Burrow Jr.

A Baltimore mortgage broker introduced him to Suburban in April 2005, when he was looking for $1.3 million to refinance and finish construction of a home in Ellicott City. His loan application listed his occupation as minister and his income at about $30,000 a month. The bank didn't ask him to prove he could make the $9,100 monthly payment, just to sign a paper stating he could. Two months later, Burrow scrawled his name on some documents at a Timonium title company and got his money.

But Burrow never made a payment, according to court records, and then filed for bankruptcy. Late last year, he sued Suburban, claiming his income was just $4,700 a month and that the bank lured him into a loan he couldn't afford. He and Suburban's lawyers are still arguing in court over who misled whom.

Started in 1955 and run until the end by its founding family, Suburban once represented the idyllic image of a small-town thrift, taking deposits and lending conservatively to people and communities it knew. But regulators say its decision, sometime around 2005, to start lending freely to new customers with few or no questions asked propelled it into a precipitous implosion of bad debts that ended with its seizure by federal regulators on Jan. 30. It was Maryland's first bank failure in 17 years.

After federal agents took over Crofton-based Suburban, they found that 72 percent of its mortgage loans had been made with "less than full" documentation.

Suburban's story, regulators said, is that of a classic bank failure, one that embodies the wave of reckless lending and unchecked ambition that has shattered banks across the country.

"I don't know the motivation, and I don't know the people involved. But every year they could have changed, and they chose not to," said Timothy T. Ward, deputy director of the federal Office of Thrift Supervision.

"It's just an age-old adage that when times are tough you have to return to fundamentals - which in banking means making sure the borrower has the ability to pay. They didn't do that."

Documents on file with Ward's agency attribute Suburban's collapse to "the failure of the Board of Directors and managers to oversee an aggressive lending program." None of the bank's executives or directors, including President Robert L. Morrison Jr., would talk about the institution's demise.

But in interviews with regulators, former employees, customers and people involved in Suburban's dealings, a more complicated picture emerges.

For the first 50 years of its existence Suburban Federal led a relatively benign existence. Among its more remarkable business moves were the takeover of parts of failed rivals, including Annapolis Federal Savings in 1991, and its move from Prince George's County to a new corporate headquarters in Crofton in 2001. It focused on managing deposits and making loans to existing customers.

Then, around the time that Morrison Junior, the founder's grandson, was installed as chief executive in early 2004, the bank's ambitions changed. It acquired Westview Savings Bank, a smaller thrift in Baltimore, to expand north. And most importantly, it opened satellite loan offices in Timonium and Northern Virginia, hoping to exploit the burgeoning market for real estate loans.

At those offices, regulators said, Suburban shifted into a faceless mortgage lender whose customers included anyone that loan officers and affiliated brokers could find.

One loan officer who spoke with The Baltimore Sun said that early on they were scrambling just to make a living, which seemed unconscionable, given the easy money everywhere else. Competitors were loosening standards and reaping profits in the mortgage business as Suburban offered conservative loan products with uninspiring interest rates.

Loan officers complained to top management that "we're losing loans right and left. We can't make a living," the loan officer, who wanted to remain anonymous because she is still in the banking business, recalled in an interview this week. "We had to compete."

Management relented and started offering more innovative loan products with relaxed terms and little or no credit or documentation required. It also began making considerably larger loans, often to customers it didn't know, in areas where it did little or no banking business.

Federal regulators, who conduct regular audits and on-site reviews of banks like Suburban, said the first signs of trouble surfaced quickly in 2005. Examiners saw an increasing number of mortgage loans on the bank's books that were not backed up with clear documentation of the borrowers' finances. The number of late and delinquent loans soared from $920,000 at the end of 2005 to more than $8.2 million a year later, according to documents filed with the Federal Deposit Insurance Corp. Eventually, that figure would reach $55 million, more than 15 percent of the bank's assets.