ROCHESTER, N.Y.-Credit unions will not be able to completely absolve themselves from responsibility for the mortgage foreclosure "tsunami" one industry analyst predicts will hit this summer.
Robert Manning, research professor and director of the Center for Consumer Financial Services at the Rochester Institute of Technology here, contends that three issues-poor loan modifications, adjustable rates resetting, and five-year interest-only and jumbo loans coming due-will combine to make the mortgage mess worse in 2009.
"That's what Obama's administration is trying to prepare for," said Manning, whose analysis for the Filene Research Institute's study on the foreclosure crisis in Michigan helped him draw that conclusion. "We are going to have such a disaster in the housing market this year because we have three very different waves of foreclosures coming together at once."
Manning has authored a study, titled "Keeping People in Their Homes: Policy Recommendations for the Foreclosure Crisis in Michigan," that examines the reasons why foreclosure issues spiraled upward in the Great Lake State. Those findings, Manning said, are representative of what's happening across the nation and they indicate that credit unions have played a greater role in the mortgage meltdown than what's currently believed.
"We learned that credit unions stepped outside of their comfort zone, and while they did not directly, in many cases, contribute to the mortgage problem, indirectly many of them did," asserted Manning.
Credit unions played a role in the real estate decline by attempting to compete with banks, according to Manning. While not making many of the exotic loans, many ignored CUs' conservative underwriting standards, writing loans to Fannie Mae and Freddie Mac guidelines to sell them to the secondary market. To a large extent the problems are not on the credit unions' books, Manning added, since many kept only the good loans in-house.
"In general they tried much harder than commercial banks in adhering to their more traditional and risk-adverse lending standards," Manning said. "I hope credit unions have learned their lesson that simply because they could sell those loans to Fannie and Freddie does not absolve them from the fact that those were bad loans."
Also contributing to the study were William Jackson, professor of finance at University of Alabama; Mark Meyer, CEO of the Filene Research Institute; and George Hofheimer, chief research officer for the Filene Research Institute. Manning's study provides recommendations on how to pull the country out of its foreclosure problems.
Some of the critical steps to recovery are "strategic and judicious use of consumer bankruptcy to encourage good faith mortgage modifications," and the importance of "shared equity. It's crucial for any federal policy to have some form of shared equity agreement so we can get principal write-downs on these mortgages," Manning said. "The government and the loan originator must be willing to share in the loss. And that way we can start seeing a floor."
Some Of Study's Other Main Proposals:
* Streamline and reform the home foreclosure process.
* Require lender accountability for mortgage modifications.
* Establish a mortgage modification database to discourage exploitation of the proposed loan modification system by unscrupulous consumers.
* Encourage formation of local and state working groups for homeownership assistance and advice.
* Establish responsible debt relief programs that allow financial institutions to assess the future debt capacity of highly indebted households and formulate realistic work-out plans for secured and unsecured loans.
* Convene local debt summits to assess local housing trends and identify appropriate resources for homeowner assistance.
Manning reiterated what many industry experts have said regarding the mortgage crisis, that it presents credit unions with a tremendous opportunity to extend their reach into local markets with consumer confidence in the banking industry shaken. "One of the biggest problems our country faces is a huge opportunity for credit unions," Manning concluded.
The study has been presented to the Michigan legislature.
