PASADENA, Calif. -
"I believe credit unions are the best place to go, but we need to get in front of our members," said Dan Green, executive vice president and chief operating officer for Tukwila, Wash.-based Prime Alliance Solutions, which combines credit union, mortgage and technology representatives.
Recent events have brought a greater sense of urgency to the task, Green said. The self-described "credit union lifer" told the WesCorp CFO Forum here CUs have too many members languishing in sub-prime loans.
"Even though it is all the rage in the news today, sub-prime lending is nothing new," he said. "Sub-prime lending has been around since the beginning of mortgage lending. It has been described as a 'disaster,' but things are not as bad as they used to be."
Still, he said, many CU members are "drowning" in their loans. In some cases, these borrowers are in sub-prime loans-but shouldn't be. Green said the current sub-prime problem was brought on not by credit issues, but by a loss of housing affordability in many markets.
In the past 20 years, median home price growth has far outstripped median income, leading to a housing affordability gap. "This led many people to take out sub-prime loans," he explained. "The 'new' products on the market are variations of old products, such as interest-only loans. Originally, these were for savvy borrowers who knew they wouldn't be in a house for long-they were not intended for people of modest means."
Other sub-prime trappings, such as stated income loans, pay-option ARMs, and low- or no-document requirements, have spelled trouble for many CU members, he continued.
"Low teaser rates allow borrowers to convince themselves they can afford a house," he said. "Buying a home is not rational, it is an emotional transaction. When an adjustable-rate loan resets, borrowers experience payment shock. In some cases, borrowers were not told the whole truth."
The numbers are scary, Green said. In 2003, sub-prime loans accounted for just 11% of all mortgages. In 2005, that percentage rose to 33%. Making the situation even more precarious: in 2001, 25% of the sub-prime market was low- or no-doc loans; in 2007: 40%.
"This is frightening to me," he declared.
In many cases, sub-prime loans can be defined as predatory loans, Green said. Such situations include: if the loan is based on a house's foreclosure value, if the terms cause "serial refinancing," if the lender uses fraudulent or deceptive practices, and if the loan includes pre-payment penalties.
"Pre-payment penalties went away for a number of years, but now they are back," he advised.
There are many reputable sub-prime lenders, but the "shady" ones give mortgage bankers a bad name, Green insisted. He said brokers often play a dual role of originating the loan and serving as a trusted adviser.
"Credit unions need to be there. They need to become the trusted adviser," he said. "The perfect slogan for credit unions would be: 'We Fix Broken ARMs.'"
