COLORADO SPRINGS, Colo. -
That was the message from members of CUNA's Lending Council, who told Credit Union Journal their CUs stuck to sound lending guidelines when others took on risk that was dependent on an unsustainable continuation in the rise of home values.
Bill Vogeney, SVP and chief lending officer for Ent FCU, based here, said the danger lurking in teaser-rate, interest-only and option-payment mortgages was foreseeable through application of a well-known scientific principle-from the field of physics, not mathematics or economics. "I've been in the business for a long time and have seen many credit cycles," said Vogeney, who also serves as a member of the Lending Council's Executive Committee. "What bothers me is when things are going well, lenders chase every loan they can get and loosen their guidelines to the point there may as well not be any guidelines. It creates a bubble in the market and the economy that is unsustainable. The physics law that for every action there is an equal and opposite reaction-the same thing applies to lending."
Another element of the current market that drew Vogeney's ire is automated valuation models. He said these systems have become commonplace, but problems arise when lenders use them blindly.
"It is a statistical program that can look at a lot of factors, but we see things that don't make sense-such as a valuation that comes up $50,000 higher than every other home on a block of track homes. We don't put blind faith in the numbers."
Ent carries a $280-million home equity portfolio, and its 30-day-and-above delinquency ratio is a mere 0.17%. Delinquencies in the greater market, he pointed out, are running about 2%-3%. "We put in steps to protect ourselves from potential problems, and we make loans that make sense. We only offer the best terms, such as 100% loan to value, to our best borrowers. In contrast, we saw many in the industry giving an 80/20 loan-80% on the first mortgage, 20% on the second, no money down-to borrowers with 580 FICO scores, and then not documenting income. We don't loan more than 70% loan to value to 580 borrowers."
Keith Reynolds, VP-lending for CEFCU in Peoria, Ill., and vice chair of the Lending Council's Membership Committee said a statement by a lender in a recent article "stunned" him. "He said for mid-range scores such as 580, things are getting tighter," Reynolds recalled. "We don't consider 580 a 'mid-range' score. If they consider 580 a 'mid-range' score, no wonder they are having trouble!" CEFCU "has been focused on what's best for the member. Specifically, not putting our members in an interest-only loan that is going to become unaffordable later. We do very few adjustable-rate mortgages," said Mark Hoffmire, VP-mortgage lending. "We have not introduced the kind of programs that have come under regulatory scrutiny in recent months." As a result, Reynolds said, CEFCU's delinquency rate on first mortgages over the last two years has not been higher than 14 basis points in any given month.
Market Offers Opportunities
Allan Stevens, senior lending officer of Franklin Mint FCU in Broomall, Penn., said not many of its members are "in trouble" so far, but he expects a significant number to face adjustable-rate payment shock either by the end of this year or in 2008. "A lot of people got into loans that are fixed for two years, then adjust every year thereafter," he observed. "We offer adjustable-rate loans and interest-only financing for some members, but we do not offer payment option or negative amortization loans."
Once or twice a month, Franklin Mint Federal Credit Union hosts mortgage seminars for its members. Stevens, who is chair of the Lending Council's Conference Committee, said the credit union generally is looking for members interested in purchase-mortgages, but also gears part of the seminars to discuss refinance mortgages.
Franklin Mint soon will institute a data mining program designed to sniff out members who may be on the path to trouble, Stevens said. The credit union is investigating third-party vendors that can go through its membership lists and compare the names to lists of homeowners in the area to determine which members have adjustable-rate mortgages that are about to reprice, which allows targeted marketing.
Early Delinquency Intervention
Ent Federal Credit Union's Vogeney said one of the things his credit union is doing to help its members hurt by the credit crunch is a partnership with BALANCE, a division of Consumer Credit Counseling Services of San Francisco. "BALANCE has a new program for early delinquency intervention," reported Vogeney. "We send information on the program to our members. It gives members guidance and assistance when faced with loss of their house due to exotic loan products such as option ARMs."
Vogeney said there are $1 trillion in loans that will be resetting in 2007, meaning many consumers will see their payments go up exponentially. "Especially people who were subprime or alt-A borrowers whose payments might be going up $400 or $500 per month. It affects the servicing side of the market, because the servicers are doing everything they can to postpone foreclosures and keep people performing and in their houses."
Bigger Piece of a Smaller Pie
Hoffmire said CEFCU only has had a few individuals come to it with ARMs whose rising rates lifted house payments beyond their means. He said one member's loan was resetting every six months, and she was willing to sign up for a CEFCU loan, even with an adjustable rate, as it was better than the one offered by her former lender. "July was one of our best volume months for closed mortgage loans in the past couple years, and August is shaping up well," said Hoffmire. "Other lenders are tightening down, limiting their loan-to-value ratio and borrowers have to have a better credit score."
"Our fear is good borrowers are being confused by what they are seeing in the papers. They think with the tightening they won't be able to get a mortgage, even if they have strong credit," Reynolds added. "There is a smaller pie, but we are getting a bigger share of that pie."
There are many opportunities in the market for CUs, Ent FCU's Vogeney declared. He recommended credit unions work with Fannie Mae, which has relatively liberal guidelines. "If a borrower has been in a house for two years, even if the debt-to-income ratio is higher than normal, we have helped people going through an interest-rate reset into a new loan. We don't have to sell to Fannie Mae because we carry many loans in our portfolio." On the down side, he continued, there are a lot of people who aren't going to be able to get help. Vogeney said many will be forced to turn to their current lender to see what kind of rate or payment break they can get, because the CU can't refinance someone who owes 105% or 110% of the home's value.
"There has been talk of credit unions putting together programs to assist their borrowers, but they should use caution. Make sure the loans are conforming to Fannie Mae standards and the credit union can get mortgage insurance," he advised.
"A lot of people bought houses they couldn't afford," Vogeney added. "Standards in the marketplace relaxed so much, a lot of people will lose their houses. I wish I had a magic wand to make sure people could make their mortgage payments, but I can't. People who qualified for a stated income loan now have to qualify based on their actual income."
