ATLANTA -
According to John Murphy, VP-mortgage services at the $171-million CU, the product is a good source of non-interest fee income. Since the loan program began in November 2005, the CU has underwritten almost $10 million in loans, generating roughly $200,000 to $230,000 in non-interest fee income. And all of the loans are sold to the state of Georgia–including servicing–so there is no risk to the balance sheet.
But fee income wasn’t the primary driver for participating in the program, Murphy said. Instead, the credit union was looking to help good, hardworking members, and not just those who might be a “charity case.” It was seeking a loan product that could serve that niche of the market while also being self-sustaining on the cash flow side. For every $100,000 loaned, the CU generates $2,200 to $2,300. “For ten loans that’s $23,000,” Murphy said. “It would take a lot of ATM fees to recover that. So you make a loan and you make a friend. Or you could charge fees and upset your members.”
The credit union’s program–a fixed-rate 30-year loan–provides increased down payment and closing cost assistance to eligible buyers who may also qualify for a low interest rate. To qualify, borrowers must have a “reasonable” debt-to-income ratio, a minimum FICO score of 620, and an income that cannot exceed a prescribed ceiling. Those with a 680 FICO score or better qualify for the lowest rate, which was 6% at presstime.
The program–offered through the Department of Community Affairs First-Time homebuyer Program–also includes subsidies to help the borrower reduce the amount of the loan, including grant funds from the Federal Home Loan Bank of Atlanta, and a “soft” second mortgage. “For example, take a $100,000 loan. Say the borrower has a $2,000 down payment. We give them a $5,000 soft second and $10,000 in grant money,” Murphy explained. “That reduces the loan amount to $83,000. So the payment is far less than it would be on a straight 100% loan or even an FHA loan.”
Murphy acknowledges that the loan is not for every credit union, because streamlining underwriting and processing is essential. “We can turn around one of these loans in 30 days,” Murphy said, adding that the key is having an underwriting team that understands all of the guidelines the loan must conform to–the mortgage insurer, the state of Georgia, and Fannie Mae or Freddie Mac.
“That can be difficult to do. But if you do the loans right, and you get your system down, your margins can be greater than they are on a typical secondary market loan where you may only be getting a 50-basis-point gain on sale,” Murphy said. “In this case the state is paying slightly above average gain on sale.”
The focus of the program has always been on member benefit–and Murphy believes the product has saved many from the “mortgage bombs” that are resetting. “The typical candidate for this loan certainly falls into the subprime category. We feel we have rescued many from a mortgage that was not in their best interest.”
