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.
Another troubling sign was that loan officers at the satellite offices were paid to find borrowers and execute loans, but bore no consequences if those loans went bad. It was a formula for disaster, Ward said - a new and riskier line of business with inadequate controls.
Investigators raised concerns, Ward said, only to find in subsequent examinations that Suburban had broadened its risky lending into land and construction loans.
"Most of the time, institutions take some corrective actions that have been identified by the examiners," said Ward. "In this case, they expanded their new activity."
One of the earlier no-documentation loans Suburban offered under its new programs was made to Burrow.
Court papers say that in April 2005, Burrow was constructing "a palatial, seven bedroom residential home on over five acres of property with amenities including a movie theater, recording studio, gym, and media room." Suburban agreed to refinance his existing $872,000 mortgage and give him $389,000 more to finish building. Two months later, Burrow settled a loan for $1.3 million, bringing in $41,000 in points and fees to the bank and the mortgage broker.
In a lawsuit filed late last year, Burrow says Suburban misled him about the terms of the deal, a claim the bank's attorneys dispute. Burrow said he could only speak through his attorney, who declined to expound beyond documents filed in court.
Sidney P. Levin, a Baltimore-based broker who helped arrange the loan, said he wasn't involved in checking Burrow's credit or determining whether he could afford the loan. That was Suburban's job, he said. "I just submit it to the banks, and they make up their own mind," said Levin. "Once those no-doc products came out, everyone was using them. The market was so good that's what everyone was selling."
What burned Suburban more than anything - not just on that deal, but on scores of loans - was that the value of houses and construction projects dropped when the real estate market cooled, often to less than the amount of the loan, Levin said. Burrow's house was once appraised for $3 million.
"As long the value is going up, it doesn't matter," Levin said.
Indeed, Ward and other regulators say Suburban might have endured its foray into no-documentation lending if the real estate market hadn't crashed. But as values dropped, the amount of bad debt on Suburban's books soared. With capital of around $30 million, Suburban could not afford to have many large loans go into default.
In February 2007, regulators, noting a sharp increase in Suburban's bad assets, sent the bank a "troubled condition" letter prohibiting it from making new development and construction loans. As property values continued to drop, even borrowers who already had loans say they felt the bank tightening down.
In several cases, developers said, the bank stopped allowing cash "draws" for projects, prompting construction crews to walk away and leave Suburban to foreclose.
John Thompson, a Montgomery County builder, had a $1.575 million loan for a construction project in Potomac but said he had to stop work when Suburban stopped releasing money to him. He blames the bank for not foreseeing the crisis.
"I did everything the bank asked me to do," Thompson said. "I was at risk, and my company was at risk. They hurt a lot of people."
But others say the bank and the developers were caught in the same death spiral as others in the construction and lending business.
"Who in the real estate market believed that this market would drop as it has?" asked Dan Demeria, owner of Potomac Heritage Homes, which developed housing in Montgomery County with a Suburban loan. "If somebody had that crystal ball, and there is a regulator out there that had that crystal ball, I want to hire them."
In August 2007, with the bank's finances deteriorating rapidly, federal regulators and Suburban's directors began negotiating a recovery plan. In March 2008, the Office of Thrift Supervision issued a "cease and desist" order shutting off much of the bank's lending business. Bank officials cooperated in crafting the order, Ward said.
But they hadn't given up, and the bank negotiated with potential buyers and investors to save itself. Dutch insurer Aegon looked at buying the bank in November as a way to access federal bailout funds but eventually decided it didn't need the government aid. A second potential buyer, whom Ward wouldn't name, looked over the bank's books in the days before it was taken over and discussed making an infusion of cash.
The sale didn't materialize, and Ward said it never seemed likely to work. By the fourth quarter of last year, Suburban needed about $20 million in cash to reach the government's threshold for "well capitalized" banks, though it was burning through money so fast that it probably needed closer to $60 million to stabilize the business.
"They still would have been a very troubled institution - likely a failure," said Ward.
On Jan. 30, regulators seized Suburban and sold most of its assets to Bank of Essex, a Virginia bank that quickly renamed its branches. Essex bought almost all of Suburban's loans and other assets, at a $45 million discount. The total cost to the Federal Deposit Insurance Corp. to transfer the business and clean up Suburban's balance sheet was roughly $126 million, more than one-third of Suburban's asset base.
Gary Simanson, vice chairman of Essex's parent company, said the new owner is still sifting through the portfolio to decide what to do with each of Suburban's loans. But one thing is certain, he said: The lending business will be much more stringent.
"We will use our credit underwriting standards, as opposed to what their underwriting standards were," Simanson said. "The old policies and procedures no longer exist."
Demeria looks at an unfinished house in a development he has in Potomac and is reminded of Suburban's demise. The bank foreclosed on the house in January and bought it at auction for $700,000. It was once valued at more than $2 million.
But Demeria still has compassion for Suburban and its founders, who he said did nothing different from what most bankers were doing.
"It's unfortunate [Morrison] got caught up in something that anyone of us could have got caught up in," he said. "The entire U.S. is caught up in it."