While acknowledging credit unions are carrying less risk than most mortgage lenders, the chairman of NCUA is cautioning CUs that they still need to be wary of allowing borrowers to use interest-only loans simply to qualify for higher-priced homes in hot real estate markets.
In particular, said NCUA Chairman JoAnn Johnson, she wants credit unions to keep a cutious eye on "exotic" adjustable-rate products.
"That's my word: 'exotic,'" she said. "Consumers are showing a demand for exotics, especially in markets with high appreciation. Credit unions are relaxing standards just to qualify people for a loan."
Typically, Johnson explained, adjustable-rate mortgages become popular in times of high interest rates. However, the opposite has occurred in recent years-while rates have been at or near generational lows, "borrowers are using adjustable-rate mortgages to be able to afford higher-priced homes," she said.
In California, in the first six months of 2005, interest-only loans accounted for 61% of mortgage loans, Johnson said. "In 2002, only 2% of mortgage loans were interest only. That is a cause for alarm," she declared.
Another area for CUs to watch closely is the extreme appreciation in home prices. Johnson said the cost of a house in markets that include California, Rhode Island and the greater Washington, D.C., area has doubled in the last five years. As a result, "lenders have become more creative in products, more aggressive in marketing, and possibly they've relaxed their credit standards."
"What lenders are doing is qualifying buyers at the initial, lower rate, rather than at the subsequent rate," she explained. "They are lending buyers the down payment."
The full effect of these relaxed standards is not available because the issue is too new, Johnson said. However, she said not evaluating the ability of borrowers to meet increased payments "replaces interest rate risk with credit risk. A drop in real estate values will result in hardship for borrowers."
The objective of a credit union regulator in the current real estate and interest rate market is to make sure CUs have an exposure plan in place, she said. "I want to ensure credit unions avoid unsafe lending practices."
"Home ownership is at an all-time high, but there's a lot more we can do," she said. "It is important to the community, because people take care of what they own. NCUA is encouraging credit unions to make mortgage loans because we want to increase that 2% figure. But, we also want to ensure credit unions are analyzing credit risk and are lending in a safe and sound manner. Credit unions can make a difference for many people across the country."
NCUA's focus has been on risk management, Johnson told the audience. At the same time, it bothers her that CUs hold just 1.95% of all mortgage loans in the United States. "I want to see that grow," she said.
