SACRAMENTO, Calif.-Credit unions largely report few members are "walking away" from their CU mortgages, but the numbers may be larger than most think, due to reluctance of members to admit that's exactly what they are doing.
The Golden 1 CU, for example estimates as much as 10% to 20% of its real estate loan defaults are a result of members intentionally defaulting without a true need to do so, "as a means of strategically repositioning their financial status for increased long-term personal wealth," according to Terry Halleck, CEO of the $7.1-billion CU.
Halleck said her credit union "has seen some evidence" of members walking away from mortgages where the property value is significantly less than their real estate debt.
In most instances, she told Credit Union Journal, a member will not admit the intentional act of a strategic default. "But occasionally it does become evident during the course of discussion regarding the member's continued financial capacity to pay versus the relief being sought due to housing market value declines," she said. "Of course, not all members will return phone calls from the credit union regarding their delinquent mortgage. Some of the members not returning calls may also be engaging in strategic defaults and intentionally avoiding such conversation as a result."
How did Golden 1's loss mitigation team come up with the 10% to 20% estimate? That's based on loan modification and short sale requests from certain members, Halleck explained.
Despite ample evidence from Golden 1's review of tax returns, account statements, paystubs and W-2s that indicate the members still would be able to make their payments, cover letters from those members often contain a sentence that conveys a variation of the following theme: "As you already know, the real estate market has taken a hit and our property is not worth what it was when we purchased it..." That line, Halleck said, is often the dead giveaway of a planned walkaway
Because those executing a walkaway will not admit the action, Halleck said Golden 1 management must extrapolate a strategic default percentage.
"Members engaging in strategic defaults are reluctant to admit they are proactively seeking self-enrichment at the expense of all fellow members, while others struggle to pay their debts and/or have legitimately lost their jobs and substantiated a true need for financial relief," she said. "We are very fortunate that members electing strategic defaults are only a very small percentage of our membership."
