SAN JOSE, Calif. -
Credit Union Journal interviewed numerous credit unions to probe for what, if any, credit quality issues they are seeing and the types of strategies and underwriting standards being implemented in response. Some common themes: constant analysis and perpetual monitoring-and a healthy dose of caution. Though all of those interviewed for this story reported little or no change in credit quality, there were concerns that credit union portfolios may lag the market.
"Personally, I think there are more challenges ahead," said Hudson Lee of Meriwest Credit Union. "I don't think we've seen the peak, yet."
One of the reasons the mortgage market has been taking a hit is the fact that so few people have a thorough understanding or mortgages, according to George Shipman of Glendale, Calif.-based California CU.
"As far as credit quality goes, we haven't seen a spike up in our real estate delinquencies nor in our charge-offs," noted Shipman. "But we have noticed an increase in requests to refinance out of problem loans, so this is definitely not over."
The real problem, he said, is in property values-which can be a little sneaky. Having been a licensed appraiser and taught real estate classes at area community colleges, Shipman knows all the tricks. "The issue is how you define value. There are three methods. The first two are average price and median. Both are flawed right now, because you have to consider the mix. Right now we have fewer sales, so the mix is more easily skewed, particularly where you have higher-end properties that can really throw everything off."
The third method, he said, is paired sales, which is when you look at a house that was recently sold and compare it to the price of that same house the last time it sold. "It's the only reliable approach," Shipman counseled. "And when you look at that, you will see that property values are, in fact, declining-even in this area (the notoriously expensive Southern California real estate market)."
Another big issue: pricing. "I've noticed yields rising and the rates on notes or premiums you pay to sell loans on the secondary market, especially jumbo loans," Shipman added. "The yields required to sell have gone up substantially, so we're opting to hold more loans in our portfolio for now. It could be a definite problem down the road. Right now we have enough liquidity that we can afford to hold them, but every credit union is going to have to look at their situation to see how much they can hold and for how long."
Constant Analysis Is Name Of The Game
PEORIA, Ill.-At the $3.3-billion CEFCU, the name of the game is constant analysis, recalibrating pricing and avoiding layered risk.
"One area that we are different is that we risk-base price 30% of our consumer loan portfolio. I think we've done a pretty good job of managing that, but some accuse us of being too focused on analysis," said Keith Reynolds, VP of lending. "We are constantly analyzing FICO scores in bands of 10 to see where the impact on delinquency is at different levels. We are constantly recalibrating our pricing based on that."
CEFCU takes that criticism in stride, since its "obsession" with analysis seems to have worked. "We've got our pricing right," he said, noting he can't say the same for some other lenders in the area.
"We compete with other credit unions, and what we have seen, especially with risk-based auto lending, is you look at their pricing and I can't figure out how they're making any money on them," Reynolds said. "Our expenses are very low for the industry, and I look at some of their pricing and I have to wonder if they've done enough analysis to price correctly."
A key part of that analysis is looking for multiple areas of risk in a given loan. "You look at payment history, which is a primary indicator, but you also look at time on the job, the loan to value," added CEFCU VP of Real Estate Lending Mark Hoffmire. Sometimes that layered risk isn't so straightforward. "A lot of loans have low debt ratios, and it looks good until you realize that the loan went to a 22-year-old who is living at home with his parents and pays no rent," Reynolds related. "That's fine, but you have to ask how long will they be living there and paying no rent? What happens to that loan when suddenly he's moved out and paying rent?"
To get everyone at CEFCU on the same page, the credit union started including branch managers in the charge-off review meetings to they could get a first-hand look at what the loans and collections people are seeing every day. "They saw the patterns jump out at them pretty quickly: there are very few charged off loans with credit scores above 660, there are very few who have some equity in their home. Even in the C or D tier, if they had job stability and they weren't upside down in the car loan, you'll see very charge-offs there."
Clean-Up Of Lending 3 Years Ago Is Paying Off
PANAMA CITY, Fla.-Tyndall FCU CEO Jim Warren figures his credit union is in very good shape to weather any kind of credit quality storm, after having had to clean up its lending portfolio, policies and procedures just a few years go.
"When Keith (Rountree) took over our lending, our delinquencies and charge-offs were about double what they are now," he related. "He really came in and cleaned house. We invested in training our people and adding accountability to the process. And it's worked, and I think that has put us in a really good position to deal with this now."
Though the $810-million Tyndall's mission to rein in charge-offs and delinquencies has caused some-including the examiner-to ask why the credit union isn't making more loans and helping more members, Warren insists that is exactly what the credit union is doing. "Our turn-down ratio has not gone up, it's at about 19% to 20%," Rountree noted.
Still, Tyndall FCU is ever vigilant about what's happening with the portfolio. "Our delinquencies and charge offs are stable, and they're low. But our CFO just told us that our late fees went up a little bit, so that could be a sign of things to come, so we're keeping an eye on it, but we think we're doing OK."
Tyndall's strategy: monitor 30-day delinquencies closely, and start calling those members prior to the 30-day mark-as early as two weeks-to try to head off any problems. "It's really a combination of lending processes and the collection program," Rountree offered. "We analyzed our charge-offs and reworked our procedures. We look at the credit score plus some additional factors, such as debt ratio, time on job, the unsecured debt ratio. You've got to really identify the problem and meet it head on, and that's what we did."
Examining Loans At Macro Level, Helping On Mico Level
CARSON CITY, Nevada-Greater Nevada CU has seen some "minor deterioration" in credit quality-not enough to set off alarm bells, but enough to keep the credit union on its toes.
"This is similar to cycles we've seen in the past," GNCU's Wally Murray explained. "We're working to assist our members who have gotten into trouble with credit counseling and helping them work through these situations."
That, of course, is on a case-by-case basis. On the macro level, the $506-million Greater Nevada is carefully looking for any patterns that might point to a bigger-picture problem
"We're looking for a root cause-is it geographically based or among a particular employment group?" Murray offered. "We have seen a reversal in price acceleration. There's been some retrenchment, but not enough to need to reassess our home equities. Most of those are only two-thirds utilized, so there's plenty of cushion."
GNCU's key focus: relationships. "This is a relationship business, and we are working to network with real estate agents. This is an important time for them to be consultative with their customers, and we're getting a positive response because they know we're not some fly-by-night mortgage broker, we're not going anywhere."
'Dumb Luck' Really A Long-Term Revamp Of Lending
JACKSONVILLE, Fla.-VyStar CU says it has had some "dumb luck" that has helped position the credit union to weather the stormy lending market.
"I don't want to make it sound like we had this great foresight or anything, it was really just dumb luck that we had just reorganized our lending department a few years ago," said Kathy Bonaventura, chief lending officer at the $3.2-billion credit union.
But that reorganization has made all the difference. "We've seen a little bit of a slowness to pay, but we have not seen higher losses. Our delinquencies are stable, but we're having to work a little harder to convince people who are past due to pay us," she related. "But the point of centralizing our lending was to get our delinquencies under control and create a more consistent experience for our members."
In 2005 VyStar reviewed the performance of all of its loan officers, picked out the cream of the crop and created a centralized loan department that spends much of the day focused on loan applications that don't pass muster with the automated lending solution.
"When that's all you do, you really get good at it, you really start to see the patterns," Bonaventura said. "We really wanted to understand our portfolio before we made any changes, so we went through a lengthy process of analyzing the portfolio and drilled down even to the individual lenders to see what our strengths and weaknesses were in underwriting."
Once the characteristics of good loans versus bad loans became clear, VyStar was able to tailor its loan offerings better. For example, the CU created its Smart Wheels program, loans designed to help first-time car buyers or borrowers with impaired credit. It allowed VyStar to continue helping members who needed it the most, without bleeding the credit union dry. "It helped us stem the tide," she commented.
But lending is a two-prong process, Bonaventura added, and that second prong-collections-is just as important as originations. "We implemented standards for our collectors, right down to there being a certain number of calls they have to make."
Being Proactive About Member Contact Is Key
SAN JOSE, Calif.-Meriwest Credit Union and its CUSO, Meriwest Mortgage, know that just because they haven't underwritten bad mortgage loans, that doesn't mean members weren't getting into trouble with other lenders.
"We have seen some increase in delinquencies, but it's been relatively modest," said Hudson Lee. "Still, we look at the environment we're in and how the problems in the subprime market has affected our market in general. You can have a person who didn't have a subprime first or second mortgage but he lost his job and now has to sell his home in a market with lots more supply and he's having trouble getting the value on his home, and that's a big deal for him."
As a result, the $1.1-billion Meriwest is taking a harder look at both valuations and location, according to Mark Antonolio, who added, "We also are more aggressive in determining whether someone getting a home equity loan from us has a subprime first mortgage.
The credit union's key strategy: analyzing delinquencies and credit scores several times a year.
"If we see someone's credit score has deteriorated, even if they're still current with us, we'll reach out to them to see what's going on and see if we can help them and head off the trouble before it starts," Antonolio explained. "We also monitor the Bankruptcy Watch Score a couple times a year."
"We're really proactive, because what we've found is, if we're the first ones to contact them, they're more likely to work with us and keep paying us," Lee added.
