WEST PALM BEACH, Fla. — One CU, asking not to be identified, has identified three different turkey assumptions:
1) "We've never had a loss in our home equity portfolio. We don't need mortgage insurance for them." A lot of credit unions could have insured themselves against default risk in their portfolios, but chose not to. They forgot or didn't realize that California and parts of the Northeast had some experience in the late '80s and early '90s with significant declines in home prices.
2) "This member is retired. They'll never default." "What age group is reportedly experiencing the highest rate of increase in bankruptcies? Age 65 and above. More and more people, upon reaching retirement age, realize they don't have sufficient investment assets to retire. In fact, we've seen loan officer comments on our loans like this: 'Member has $125k in savings, can handle higher debt load.' Well, the borrower was 60 years old with $500k in mortgage debt. To be honest, that borrower needed several-million in retirement assets to support their lifestyle-and mortgage payments at age 65."
3) "Loan rates are sp low." We heard many times from 2003 through 2007, yes, rates were very low. A 1% movement in rates basically will require/allow a 10% change in prices to generate the same payment. When the 30-year fixed dropped to 5.25% or so in 2003, compared to rates around 7% in 2000, yes, prices could have increased by 20% and supported the same payment. That doesn't explain 100% or more in price increases. As I said to myself when I realized in 2006 my former home in Florida had doubled in value in five years, 'Incomes haven't doubled, why should my house be worth twice as much?'"
