Rising Home Prices Leads To New Equity Product
With real estate prices climbing rapidly here, Desert Schools FCU has introduced a new product designed to let its members tap the equity in their homes for investment capital.
In June, the $2.3-billion credit union launched its interest-only home equity line of credit product for its 290,000 members. Desert Schools FCU charges a single-lender fee of $495 on purchases-no cost on refinance loans-plus third-party costs such as appraisal, credit check and title.
As a way of differentiating themselves from area banks, Robin O'Rorke, DSFCU's vice president of lending and chief lending officer, said the loan carries no annual credit line maintenance fee.
"Banks usually charge $45 to $125 per year for this fee. We want to promote the value concept," he said.
The interest-only home equity LOC product can be used for primary homes, vacation homes or investment homes, O'Rorke said. Maximum loan-to-value on homes is 90%; 80% on residential land.
The Phoenix housing market has experienced exponential growth in the last two years. The median home price-which was in the $160,000 to $180,000-range just a year ago- recently hit $225,000 for a new house and $250,000 for resale of an existing home. O'Rorke said the premise of the new product was to "help our members maintain some sense of affordability in a market that is rising rapidly."
Emma Garcia, Desert Schools' director of community development, said the credit union has similar home equity products, but this one is the first specifically designed for individuals looking to invest in a second home.
"There has been a big change in the market in the last few years," she said. "There has been a dramatic increase in prices. That's one of the reasons why we wanted to offer this product- it lets our members take advantage of the market."
Garcia said the CU is moving slowly on promoting the new product. DSFCU's branches have plasma screens that show its television commercials, and some details are given there. Because the product is more complex than an average loan, applications are taken in a member service area, rather than the teller lines.
According to O'Rorke, the interest-only component of the loan product has generated unnecessary fears from regulators and others. While many economists across the country are debating an impending housing "bubble" and the attendant possibility of rapid loss in value, he said Phoenix is insulated from such an event. In addition, he said, DSFCU has built-in safeguards to protect itself and its members.
"There are always fears of market variation, but we have an unusual market here. There are plenty of jobs, which is bringing more people in. And, housing inventory is very low, which keeps the supply and demand situation in line."
"We also mitigate risk with how we write the loans," he continued. "The product is only for A-paper members who have good credit and have shown they can manage debt. It has a maximum loan amount of $350,000."
Desert Schools FCU has a lot of loans with very low exposure, so it can take on loans others view as risky, O'Rorke said. "And we don't think it's risky. It is a means for our members to acquire property at today's prices and keep an affordable payment, and it makes sense for a disciplined person that can handle debt."
The credit union carries approximately $795-million in loans in its real estate portfolio, with a delinquency rate of just .06%. O'Rorke said Desert Schools views the home equity segment as a key area to propel loan growth, as it funded more than $52 million in home equity loans in June.