The long arm of those adjustable rate mortgages (ARMs) and Interest only (IO) mortgages is driving consumers into the arms of credit unions and may finally help boost the CU market share at last, according to a number of mortgage experts.
Repricing ARMs and IO mortgages can make for some real sticker shock, said Linda Clampitt, SVP of CU Members Mortgage the mortgage origination and servicing provider to some 700 credit unions with $4 billion in originations and a $10-billion service portfolio. "We have 400 products to choose from and not all credit unions offer those products. But we made a strategic decision not to offer the Payment Option ARMs because I can't see any good reason for negative amortization. We do offer Interest only, but we feel it's simply a matter of educating the member. I'm amazed at the lack of disclosure on these products by so many mortgage brokers, and I think people are getting sick of being put into things they don't understand," said Clampitt.
Educating consumers may be time consuming but could prove to be the cement in the CU relationship; even when people don't like what they hear, they appreciate hearing the truth when it comes to home financing. Susan Overstreet, assistant real estate manager for First Future CU in San Diego said she spends a minimum of 30 minutes with members seeking to get out from under Neg-Am loans. "They become my new best friends and right now I have at least a dozen new best friends." Overstreet just funded a jumbo ($450,000) loan for a retired elderly woman a broker had put in a one-year adjustable that had just hit 10%. "I put her in a 'NO, NO, NO,' loan and now she and her daughter are members!"
The "NO, NO, NO" program was first offered to FFCU members then rolled out to non-members in newspaper ads in June, said Mitzi Zarcone, FFCU's VP of lending. By offering the program to jumbo mortgage holders and financing a higher loan balance, FFCU offered a lower rate and the fees are absorbed by the CU and CU Members Mortgage (there is also a low, flat fee option of $750-$950). The average fee absorbed is about $4,500, said Overstreet. CU Members Mortgage took 120 applications in the first month, said Clampitt.
"Keep in mind; we're here to help our members get out of the financial binds other lenders have created for them," said Overstreet. "Many of our members have ARMS that will be expiring or have payments adjusting to levels beyond their comfort zone."
The (Dis)Comfort Zone
Red Rocks Federal Credit Union in Highlands Ranch, Colorado provides the full spectrum of mortgage products such as interest-only and option ARMs, etc., but doesn't retain them on the books and sells the servicing as well, said Steve VanSickler, SVP and chief lending officer.
"The south Metro Denver area is highly competitive and we work with a lot of realtors to source purchase money business, so we must have access to all products. But we make sure that the borrowers sign a specialty disclosure. The borrowers are making an informed choice, and ultimately, it is their choice," he emphasized.
That disclosure doesn't mince words. Titled "Specialty Mortgages May Be Hazardous to Your Wealth!" it clearly outlines the potential for financial disaster in Neg-Am loans: "Beware: If your home does not appreciate you could owe more on the home than it is worth." It goes on to define (in welcoming plain English) the terms of these kinds of loans. A signature is required.
"There's a lot of hype in the market," said VanSickler, "and we sure don't steer people to them; but we'll try to refi to other products." VanSickler is on the board of the American Credit Union Mortgage Association, which sent a comment letter recently to the NCUA about proposed guidance on non-traditional mortgage products. A jointly published consumer guidebook from the Center for Responsible Lending and the National Association of Realtors offers great advice and there should be a similar CU-branded document, ACUMA said, but it should bear the "hazardous to your wealth" title.
Reputation Risk
"Ultimately, lenders face reputation risk should a borrower/family default and lose their home when using specialty mortgage financing, and even our disclosure after the fact may not satisfy someone that the borrowers were informed and made the choice for a particular product," VanSickler. Tired of unscrupulous lenders targeting the CU's mortgage holders with solicitations made to look like they come from Red Rocks, touting lower rates and payments, the CU is now doing the same to attract non-members with materials that show the pitfalls that may await them.
In the heartland, Allegiance CU in Oklahoma City has taken a "Just Say No" approach to these kinds of loans. "We don't offer Interest-Only, Neg Am, or Arms at this time," said, Mortgage Loan Supervisor Leasa Dougherty. "There hasn't been a high demand or inquiries on these products. We definitely discuss with members and potential members that the ARMs are rising and now is the time to get out. Last week I had two or three people come in who financed with other lenders, just panicked." They refinanced into a fixed rate at the CU, she added.
Making the member aware is key, said Dave Toepp, who manages the Mortgage Center in Southfield, Mich., a multi-credit union owned CUSO that serves members of 70 CUs and has a portfolio of $975 million. "We've got to be extra careful; the trust we have is earned, and if we put people in these loans they probably think it's OK. When we get member requests for IO loans we explain how the product works. Once informed, very few members opt for them. We're servicing almost 10,000 loans and only 20 are interest only, but we have offered the product for several years. The reason we offer it is because it is heavily marketed by competitors. It is more effective to say that we offer it and here is how it works instead of 'we don't offer it, but you don't want it.' Much of the marketing done by our competitors on the interest only product seems to involve confusing the issue," said Toepp.
"Claims are made that payments will be 30% or 40% less than a 30-year fixed rate. We all know that nowhere near 30% or 40% of your first payments goes to principal. Typically these interest only loans are also ARMs. The ARM teaser rate accounts for more of the payment difference than the fact the borrower is not paying any principal. Borrowers are better able to make decisions when they have full information. There are situations where interest only makes sense. A good example might be a couple with one spouse still in school, needing to qualify on one income, but knowing that next year, after graduation, there will be a second income," he said.
State Of Confusion
Another example of deception used to sell Neg-Am loans is confusion, he said. "These typically involve 'payment rates' that are below the 'interest rate'. Unfortunately, many borrowers do not understand the difference, and are lured by the 'payment rate,' thinking it is the interest rate. These also tend to be ARM loans. We feel that these loans will lead to 'unpleasant surprises' down the road. We service all of our loans, so we do not want to be the bearer of bad news when it happens." Toepp added that fewer than 5% of their members have ARMs and that they are refinancing consumers from other institutions.
Dean Vigfusson, SVP Retail Lending for Arizona State CU in Phoenix, also believes that these loans serve a niche, but that it's very small. "We don't offer interest-only products even though we're a full Fannie Mae lender. We do plan to offer them at some time in the future, but we see the danger in them so we'll be very conservative in our underwriting approach and member counseling."
Vigfusson said that IOs are for "the financially savvy as a tool to manage their cash flows, but when first-time buyers are pushed into them to get more 'home' for the buck it'll have a bad outcome."
It's the same with Neg Ams, he said. There are so many other viable and sensible alternatives to help buyers accomplish the same objective. "Like the interest-only loans, the trend towards using these products to assist people to buy more home than they can afford is disturbing. Ultimately, this could contribute to any downturn certain markets experience in the next 12 to 24 months. For example, a large percentage (50%-plus) of home sales in certain California markets last year were financed with these loans, and this may have a very negative effect on foreclosure rates in those areas and hence, the overall market."
Helping Members Get Unstuck
To assist members who may be stuck with these products from elsewhere, ASCU offers an aggressive, portfolio 5/1 ARM program that is priced sensibly, and also a 30/15 loan, which is a 30-year amortization with a 15-year call. "Both of these loan products allow members at least 5 years of stability and protection from rate adjustments. We believe this 5-year period is more than enough to allow markets to stabilize. We are currently working on a mailing to a select group of members who have a mortgage elsewhere to offer them these choices," said Vigfusson.
Dick Jungen, president of Central States Mortgage, the Milwaukee-based mortgage and title company CUSO that covers eight Midwest states, said the "press has done a pretty good job of scaring people about those loans so they can refi into fixed rate mortgages. It may have let you get more house quicker, but for anyone facing job insecurity it wasn't a wise choice," he said.
"We do any kind of mortgage known to man and we see the credit union reluctance for these loans and it's understandable." The bigger problem, Jungen said, was credit union CEOs who impose restrictions on the mortgage menu that really don't make sense. "I've had CEOs tell me they won't do a 3% down or a 100% VA loan. Well, those members will just go someplace else. So I see a big difference between being judgmental and helping a member decide what's best for them. I sure wouldn't want a large portfolio of ARMs in the Phoenix or San Diego area right now."
CUJ Resources
* CU Members Mortgage, www.cumembers.com
* ACUMA, www.acuma.org
* Center for Responsible Lending, www.responsiblelending.org
* National Assn. of Realtors, www.realtors.org
* Arizona State CU, www.azstcu.org
* Red Rocks CU, www.redrocks.org
* Central States Mortgage, www.csmc.net
