ORLANDO, Fla.-A year ago Travis FCU was charging off approximately $1 million a month. Today charge-offs have hit $3.5 million a month.
Moreover, it reported no ROA in 2007, will report no ROA in 2008, and is forecasting much of the same for 2009. The good news: it has 11.6% capital and regulators have given their blessing to the plan it has developed in response.
The source of the $1.57-billion Travis FCU's challenges are all around it in Southern California. Dave Purcell, VP-business services and real estate lending, noted the "dramatic" drop in home values even as mortgage balances have remained the same or grown, primarily due to borrowers tapping equity.
The credit union, which as a $1.12-billion loan portfolio, of which $270 million is in real estate, is only expecting market conditions to worsen, as eight of the 10 riskiest MSAs in the country are in California.
"People who think things are getting better are kidding themselves, I believe," said Purcell, citing a Moody's analysis that foreclosures will stay high into the next decade, unless there is some sort of bailout. "The glimmer of hope is that while home values are still declining, they are declining at a reduced rate and starting to moderate in California."
Speaking to the annual meeting of the CUNA Lending Council, he cautioned lenders to recognize that even if their auto and credit card portfolios are faring OK, they should anticipate consumers will see problems in those loans in the future, too.
What credit unions must know-and regulators will demand they know, said Purcell, who believes there is a strong opportunity for CUs to increase mortgage share-is how they can effectively mitigate losses created by non-traditional mortgage products, and what will that exposure do not just to mortgages but to the auto loan and credit card portfolio. "You need to know what kind of mortgage is underlying these other loans."
To that end, Purcell recommended:
* Ensuring loan terms and underwriting standards are consistent with prudent lending practices, including consideration of borrower's repayment capacity; recognizing that many nontraditional mortgage loans, particularly those with risk-layering features, are untested in a stressed environment; recognizing that second mortgages or HELOCs originated in lieu of a higher down payment are higher risk, and ensuring consumers have sufficient information to clearly understand loan terms and associated risks.
In Travis FCU's case it has used an application from First American Core Logic to analyze its data and match it against the company's data to develop analytics that identify the type of mortgage that is ahead of the credit union's second, for instance, and the appropriate risks.
Travis has identified the embedded risks in its current first mortgage portfolio and is doing the reviews on a monthly basis.
On LTVs of 140% or more, it is closing those lines. It is also lowering limits on other lines according to FICO. "What we're finding is that when we identify the specific loans in this bucket, we find that 75% of those loans have already been closed by collections," Purcell said.
Other steps taken by Vacaville, Calif.-based Travis include:
* CLTV reduced from 100% in 2007 to 90% and then to 80%.
* Maxiumum D/I reduced from 65% (good credit and low LTV) to 45%.
* Minimum credit score (with low LTV) incrased from 600 to 640.
* Requires a letter from members explaining intended use of cash-out
* Reviews first mortgage portfolio for neg am and interest-only loans.
* With neg am first mortgages, it computes D/I based on maximum potential neg am for any CLTV; Max CLTV with neg am first is 85%
* The maximum age of comparables is 3 months.
"This is our time to shine for members, but don't forget to analyze your potential losses," said Purcell.
