CU Teams With Bank On Viable Mortgage Program
CHICAGO-Less than four years after it opened its doors and began operating, South Side Community FCU here has begun offering mortgages, including partnering with a local bank to make the program viable.
The credit union serves a low-income portion of Chicago where the primary financial services provider are check cashing outlets. "So there is a need for our services," observed Greg Brown, the credit union's CEO.
Those services now include home loans. Brown said mortgage loans are beneficial to the credit union, its members, and the neighborhoods it serves.
"If credit unions are to remain a viable, affordable option for our members, we must be competitive with banks and mortgage lenders," he declared. "We are a community development credit union. We have a low-income designation from NCUA. It is our mission to offer affordable products to low-income families."
South Side helps members get into homes in many ways, Brown said.
The credit union offers a "competitive rate" on its 30-year fixed mortgage, and does not charge mortgage insurance if borrowers cannot make a 20% downpayment. "PMI can be very expensive, and it is a safety net for the lender; the borrower never realizes that money. By us not charging that insurance, more of the borrower's payment goes to equity and interest, which helps them develop equity."
As a relatively new credit union, Brown said South Side has a limit on how much it can lend per borrower, currently capped at $150,000. And therein lies a primary challenge: $150,000 simply doesn't buy a home in Chicago.
That has forced South Side Community to get creative.
It offers refinancing loans, works with other lenders for a portion of the origination fee, and it offers an "80/20" program in partnership with a local bank-the credit union does 20% of the loan while the bank does 80%.
"This is another scenario where the borrower avoids paying private mortgage insurance," said Brown. "In addition, it demonstrates a bank and a credit union can work together to add value to the community, and helps us to build capital at the same time."
Expensive Service
It is very expensive to serve the low-income population, which is why many of the banks do not have products and services designed for this population, Brown continued. Some members have an average balance of $150, and also drive up costs by visiting the credit union once or twice a week.
"There is a lot of financial education involved," said Brown. "We need to give them products and services designed to allow them to realize the dream of home ownership. Many need counseling on how to become mortgage ready. We are not profit driven-we practice the credit union philosophy: not for profit, not for charity, but for service-but we run the business in a manner to add value to our members. We are dealing with a population that, for the most part, has marginal credit. We help them improve their credit through counseling and by making small loans. Most banks run a credit report and, if the score is too low, they won't deal with that person."
Brown said South Side Community FCU tries not to turn down any members based solely on their credit score. For example, he said the "80/20" program accepts anyone with a credit score of 580 or above.
"If we found someone who didn't qualify for that program, but had income and had justification for why their credit score is low, we might make an exception," he said. "Some people have family medical emergencies which ruin their credit."
The Price Is Right
South Side prices its mortgage loans by taking into account the loan-to-value ratio, Brown explained. He said if a borrower is able to put down just 5%, the credit union takes Fannie Mae's rate as a starting point.
"We are taking an added risk, so we add basis points to that rate. The less they put down, the higher the rate. We are just getting started, so we don't have a track record built up to calculate ROI. But so far, so good."
Brown of South Side in Chicago said it is helpful for the individuals, the families, and the community to own more assets locally.
He said there are many predatory lenders in Chicago who target zip codes with high rates of foreclosures. To get the message out, the credit union has done press releases, presentations at community organizations and churches, and it will be doing more print advertising. As was the case with Self-Help, Brown said word of mouth is powerful.
"We also are in the market for hiring another loan officer. That person will proactively go out and solicit loans in the field and identify more potential borrowers. We work with real estate agents. We do anti-predatory lending workshops to let people know how to avoid or how to get out of those situations."
Brown, who is on the board of the New York-based National Federation of Community Development Credit Unions, said his credit union participates in the secondary mortgage program the Federation has created to buy mortgages. That program also provides services, access to capital, education and technical assistance.
"It is a strong resource for credit unions. Mortgage lending is necessary, because if you are a financial institution, you are in the business of making loans. We are taking the risk nobody wants to take. In some instances, they might have a valid point-we can't help everybody, but we can try."
Self-Help All About Building Wealth Where None Exists
DURHAM, N.C.-Self-Help Credit Union was created in 1980 here with a mission of assisting low-income families in creating wealth. That includes home ownership.
David Beck, policy and media director for Self-Help, said making a home affordable is one of its primary missions as a community development CU.
"One of the best ways to do that is home ownership," he said. "We help families who traditionally have been left out of conventional lending markets-minority families, female head of household and rural families."
According to Beck, Self-Help prices to risk, but subsidizes risk, not rate. In fact, he said said the CU's home loan rates are approximately one point higher than conventional rates.
Self-Help offers a variety of mortgage products, so there is no single pricing formula, he said.
"We have a 'Three Bears' strategy," Beck explained. "Some people have credit that is so bad we tell them steps to take to improve it and ask them to come back in six months. Some have credit so good, we tell them to walk across the street to a conventional lender, where they can get a better rate. Or, they have a few blemishes on their credit, to us, they are 'just right.'"
Self-Help CU's Beck said for loans closed from 2003 to 2006, 54% had no credit score. The remaining loans had an average Beacon score of 628.5. The lowest credit score for an approved loan: 412.
Despite taking more risks, Beck said losses on mortgage loans to members with less-than-perfect credit have been roughly the same as the conventional lenders-about 1%.
One lesson he said he has learned from working with low-income members: you have to keep a close eye on late payments.
"If someone gets delinquent 30 days, we are more hands on," he said. "We've found if they fall behind, they have a really hard time catching up because lower-income/lower-wealth families don't have reserves. If they fall behind two months, panic sets in a little bit and they can't catch up to their growing debt."
According to Beck, aggressive sub-prime lenders do not practice responsible lending. He said many of those lenders put borrowers in "awful" loans with bad terms and "surprise, they default." The CU looks for ways to reach at-risk borrowers to inform them there is a better alternative.
"We work with community groups and partner with banks who refer borrowers to us," he said. "We get many people by word of mouth, and we do outreach at conferences throughout the state. Broader marketing has not worked, because we get a lot of inquiries from people who aren't ready to be borrowers."
Two Programs Offered
Beck said Self-Help offers two types of mortgage lending programs: direct lending, and a secondary market loan through its venture fund.
He said the latter buys loans from banks and credit unions all over the country.
"They want to sell so they can make more loans. We buy the loans and take that risk of their books, and they agree to make more high-impact loans. We play the role of financer.
"Our belief is Self-Help borrowers are good bets to pay back their loans-they've proven us right-and the income we make off those loans allow us to make even more loans to more borrowers. This helps more low-wealth families become homeowners. It is a win all the way around."
- Michael Bartlett
CU Bridges Gap Between Teacher Salary, Home Cost
TAMPA, Fla.-Led by Suncoast Schools FCU here, area credit unions have become a bridge between a market in need of new teachers and teachers in need of housing. In the process they've built a unique lending niche.
Don Charron, SVP of lending for Suncoast Schools FCU in Tampa, Fla., said his credit union launched a new mortgage offering in early February called the "Home Solution" program that is open to all school employees in Hillsborough County.
Suncoast Schools is committing $100 million for the program, which offers a loan of up to 100% loan-to-value with no PMI. The maximum loan amount is $350,000.
"In this area, $350,000 will buy a pretty nice home," said Charron, who added the response from members has been immediate and positive. "It has been really popular. We've gotten a lot of calls the last couple weeks as the school district has gotten behind it. Our president and CEO, Tom Dorety, did a presentation at a school board meeting and he talked about the program. There was a live telecast for local television, so a lot of people saw it."
Suncoast Schools' motivation for the Home Solution program was to offer a tool for the school district to attract and retain teachers and support staff, he said.
Tampa, like many Florida markets, has seen a sharp escalation in home prices at the same time population growth has meant school districts must look out of state in order to fulfill demand for teachers. "Although it has softened in the last six or seven months, there still are not a lot of affordable homes," Charron observed. Seeking a remedy, Suncoast Schools is working with five credit unions in the Tampa area that have formed a CUSO and with several builders and developers to create more affordable homes.
"It is one thing to have affordable products, but we also need affordable houses," he said. "We've been doing mortgages at this credit union for 35 years. We do a lot of innovative things to get people into houses. Chances are, people are members of at least one of the participating credit unions in CU Housing Partners LLC."
Exceptions For Special Circumstances
Charron said Suncoast Schools FCU uses a 640 credit score as a minimum for its Home Solution program, but it makes exceptions for some special circumstances. Application and credit fees are waived, and if members use automatic loan payment from a Suncoast Schools checking or savings account, their interest rate is reduced by 0.25%.
"We use expanded debt ratios for this program-we want to approve more than the industry standard 28% to 36%," he said. "In addition, we use some non-traditional credit information, such as rent, utility bill payments-things that don't go on the credit report."
Suncoast Schools offers five special mortgage products to its members, Charron said. One of those is the HLPR (home loan payment reduction, pronounced "helper") program being championed by CUNA those under the Tampa area's median income level, currently $52,150.
"We have a lot of different options, depending on how long the members intend to be in the home," he said.
"I definitely think we can make money on this, and we are after the relationship," Charron continued. "If we help someone buy a home, especially their first home, we should be in good position for them to make us their primary financial institution for life. There are a lot of ancillary things that come along with it."
