How And Why Red Rocks FCU Benefited From Starting From Scratch

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CU: Red Rocks FCU

Category: Mortgage Lending

When Red Rocks FCU decided it was time to initiate a purchase-money first-time homebuyer loan, it realized it needed to completely start from scratch.

So the $128-million credit union hired a new chief lending officer who, in turn, hired an entirely new mortgage loan staff.

"The credit union really hadn't done a purchase money loan and wasn't particularly good at refi's, either," explained CLO Steve VanSickler. "We needed to hire new staff so we could start fresh. Red Rocks, like a lot of credit unions, had not advanced as the mortgage market changed."

Red Rocks unveiled a two-year rolling, adjustable-rate mortgage first-time homebuyer program in April of 2005. The loan has an introductory rate for the first year and then adjusts every two years for the remainder of the term. The index is the 11th District Cost of Funds, which, the credit union said, is a "lagging and more stable index for the member's peace of mind."

While most ARM loans have rate caps of 10% or 11% or even higher, RRFCU has capped its ARM at 8.75%. "It was set up with the expectation that the indexed rate would settle out somewhere between 6.75% and 7.25% and fall in line with the projections of where the 30-year rate would be in a few years so that the members would keep the loan on our books and not refinance into another loan."

Among the primary benefits of the loan are a downpayment as low as $500, a 40-year amortization, and a mortgage insurance component that includes involuntary unemployment insurance and temporary disability insurance during the first five years, which will make the loan payment for up to six months.

"We were trying to completely rebuild the mortgage program here, and we wanted to do something that would really catch the attention of Realtors," VanSickler explained. "Plus, we wanted to help get people into homes."

And that is a big issue in Highlands Ranch, where the property values have climbed so high that it keeps a lot of people from owning their own homes.

"One of our groups is Lockheed Martin, and we have a lot of engineers just out of college, and they were having a hard time getting into homes," he observed. "We wanted to find a way to put young families into homes."

Offering the low down payment and the 40-year term allowed for that to happen.

"The 40-year term really helps lower the payments so a first-time buyer can finally get into a house, or so a young family can afford to buy more house," VanSickler commented. "What we have found is it really doesn't increase your interest rate risk because it's a variable rate product. The low down payment is offset by the fact that we have a strong mortgage insurance product built right into the loan."

Appealing To Realtors

An important piece of the puzzle that Red Rocks hadn't really delved into before was appealing to real estate agents-a common issue for credit unions. "Building a relationship with the Realtors is so important," he stressed.

To that end, Red Rocks and a number of other Colorado credit unions recently had a booth at a convention for real estate professionals-putting credit unions out in front of some 3,000 real estate agents.

So far, the new mortgage product has been a stunning success. Through July 31, mortgage lending production is up 199% in dollar volume over the same period last year and 231% in total units.

Refinance units are up 96% and purchase units are 3,600%, the credit union reported.

"Our mortgage portfolio, which was weighted 98.44% to fixed-rate loans is now split 78.13% fixed rate and 21.87% adjustable rate loans," the credit union related. "Red Rocks now ranks as the 10th largest first mortgage producer in the state of Colorado through the first quarter of 2005 by dollar volume from Colorado's 144 credit unions, and through July 2005, we have funded $4 million of this program with an average FICO score of 688, compared to our overall average, which is typically in excess of 730."

To round out the program, Red Rocks instituted a monthly six-hour first-time homebuyer class in conjunction with the Colorado Center for Financial Education, which qualifies the members for this loan and also for down payment assistance through the Colorado Housing and Finance Authority.

"The education piece is really important," VanSickler added. "Local Realtors are now sending us purchasers and having their clients attend the class, which in July 2005 had 20 attendees. We believe a commitment to this type of lending is exactly what credit unions were created for."

Step #1: Commitment

VanSickler said other credit unions interested in implementing similar programs have to be committed first. "You really have to want to put families into homes," he said. "But if you really want to help get families into their first homes, there are tools to help mitigate some of the risk issues."

And, he said, it's well worth it.

"The great thing is that home loans are a very sticky product," Van Sickler offered. "Typically, within six months of buying a home using our mortgage product, they're looking to put a new car in the garage, and guess where they go for that auto loan."

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