LAS VEGAS -
Gamblers who come to this city know all about financial losses. But some of the biggest financial gambles and subsequent losses came not in the casinos, but in local real estate.
Las Vegas, along with Stockton, Calif., have emerged with the dubious distinction of being “Foreclosure capitals.” There have been 3.376 foreclosures per 100 households in Nevada, tops in the nation. One in every 128 households in Stockton are in foreclosure. Yet in both markets credit unions have largely escaped problem home loans, although they are not immune to the effects a rapidly cooling home market can have overall. Clark County, which includes the southern tip of Nevada, for instance, saw only a 0.66% delinquency rate for real estate loans by CUs in 2007. For credit unions headquartered in San Joaquin County in California, in which Stockton is located, last year’s real estate delinquency rate was a microscopic 0.02%.
Chris Collver, regulatory and legislative analyst for the California and Nevada CU Leagues, said the tiny real estate delinquency rate in San Joaquin County is impressive, although he cautioned the figure does not include credit unions headquartered in other counties that have mortgage loans in the Stockton area.
Still, he told the Credit Union Journal, “Credit unions are not a factor in the foreclosure problem. It is difficult to tell exactly given the Call Report data, but it appears credit unions did not get into payment-option loans. They rarely do negative-amortization loans because they are a little more cautious.”
Collver’s assessment was echoed by management at several CUs in both Las Vegas and Stockton. Some credit unions had a mere handful of foreclosures on their books, some had none, and one (Central State CU in Stockton) has not had a foreclosure in more than 25 years. The consensus: maintaining solid underwriting standards and staying away from exotic mortgages has kept most credit unions dry in a storm that has washed away a slew of lenders and borrowers alike.
Will CUs End Up Paying For Other Institution’s ‘Dumb Loans?’
Tony Mook, CEO of Cumorah CU in Las Vegas, is quite familiar with the high number of foreclosures in his city, as well as Stockton’s troubles. He recently read a report that placed Las Vegas No. 3, just behind Stockton at No. 2, on a list of U.S. markets with the most foreclosed properties. Yet despite foreclosure notices going up all around, Cumorah has just one foreclosure on its books.
“And that was a second mortgage HELOC loan,” he said. “Our delinquency rate in 2007 was only 0.89%. The reality for credit unions in Las Vegas is: we didn’t make the dumb loans when prices were going up, so we are not paying the price now that prices are going down. We are an 80/20 loan-to-value lender.”
As America’s economic troubles continue, credit unions “might see more impact,” Mook assessed.
“Even though we did not make subprime loans, we made home equity loans, and there might be some people who walk away from their properties when valuations diminish. If that is the case, other debt will be impacted. We haven’t seen that yet, but if the downturn continues it might become reality.”
How One CU Has Managed To Build Mortgage Portfolio In Down Market
Not only did Nevada FCU avoid the “exotic” mortgages that are now causing consumers and lenders alike a lot of heartburn, but the $794-million CU has managed to develop a strong real estate loan portfolio, according to CEO Brad Beal.
“Our real estate lending was strong throughout 2007,” Beal said. “We did more first mortgage loans in 2007 than 2006, which primarily is attributable to the sales force we’ve been building over the past few years, along with a strong membership that continues to be able to purchase real estate. Our real estate lending was up 16% in 2007 over the previous year.”
According to Beal, the Las Vegas housing marketplace is “far from paralyzed.” There are a large number of foreclosures, which he acknowledged is a problem. Beal said Nevada FCU is financing many buyers who are purchasing foreclosures or short sales.
“Almost half of our real estate financing is going towards foreclosures or short sales, but the people who are buying are owners, not speculators. A significant number of the foreclosures were speculators and investors who were hoping for a quick gain. People thought they could sell a house for substantially more a year later, but they ended up owing more than it was worth. There are still 5,000 to 6,000 new residents moving to Las Vegas every month, and the resort corridor is generating jobs.”
The New ‘Hot Potato’ Game: Disposing Of Foreclosed Homes
Nevada FCU has a total of six properties it has foreclosed on or is in the process of foreclosing on. “That’s out of $275 million in first or second residential mortgages,” said Beal. He noted if members have a “realistic” plan for addressing their issues, the credit union will work with them.
“Our goal is to keep people in their homes–we don’t want to own the homes. Other lenders don’t want the houses, either, which is why they are agreeing to short sales.”
Of the six foreclosures, Nevada FCU is all the way through the process on just two. Beal said the credit union has its own real estate CUSO, which lists the property to sell. He said the homes are priced “realistically” to sell quickly.
“We shoot for mid-market or a little below so folks will be attracted and buy them. We’ve sold one of the two, so we’re doing okay. We only owned the house for 90 days. Some people are attracted to foreclosures because they think they are going to get a deal. We didn’t give the place away, but we did make the price appealing,” he added.
Mook said Cumorah did an appraisal one week before the CU’s one foreclosure came up to evaluate if the credit union wanted to hold on to the property.
“The home had lost 20% of its value,” he explained. “The first mortgage was for $150,000, our second was for $60,000, for a total of $210,000. The appraisal was for $210,000 to $215,000, down 20% from 18 months earlier when the loan was made. We had to buy out the first to protect our second.”
The foreclosure process included the “hassle” of cleaning up the property and maintaining it, then selling it in a slow market, Mook reported. He said the property has been on the market since the end of December but has not yet sold.
“We expect to take several months to sell because buyers are looking for killer deals and we are listing it at $215,000. We are paying property taxes and utilities, and we send someone over to check on it every couple of days. We will have to weigh an offer versus what it costs to maintain the house.”
Mark Andrews, vice president of sales and marketing for Clark County Credit Union, told CU Journal it has had two or three foreclosures in the last 12 months.
“Foreclosure means discomfort for both the borrowers and for us, but we do feel we have dodged the bullets a lot of other lenders have had to take. We have other loans we are looking at, hoping they don’t go that way,” Andrews offered.
Andrews said Clark County CU has a relationship with a Realtor who takes the listings for the foreclosed properties. He said the homes are listed on the MLS book on a negotiated commission, then the wait for a buyer begins.
“We have to pay property taxes and utilities. If there is upkeep needed, we decide if we should put money into it to present it for sale, or sell it as is,” he said.
Andrews said Clark County CU works with borrowers as much as possible to stave off foreclosure. He said if the member has an employment problem, or perhaps insufficient income, CCCU looks to see if it can get past the temporary hump.
Housing Prices: What Goes Down Must Eventually Go Up?
On the bright side, Andrews said he believes the housing downturn will not last much longer. He said many members were encouraged by the Fed’s recent rate drops and called to refinance their mortgages. However, despite most of these borrowers having great credit, CCCU could not refinance them as home values are below the sales prices from a couple years ago, meaning “the appraisals stink,” he said.
“The negative curve on house prices seems to be flattening,” Andrews assessed. “It is still trending downward, but it appears to be losing the disastrous drop.”
Many people are waiting to see what will happen with the April reset on ARMs, Andrews continued. He predicts there will be more foreclosures and “more homes dumped on the market, which means more price competition to get the sale. My theory for existing homes is: when the price drops below the cost of building the structure, that’s when things will start moving again. Some homes are selling for $105 or $125 per square foot, which is below the cost of construction. I think we are getting close.”
Cumorah’s Mook said Las Vegas has seen some unemployment increases, but commercial construction employment continues unabated.
“There are a number of projects scheduled to be completed in early 2009, which might allow the city to ride out the housing recession,” he said.
Loan-To-Share Ratios Feel ‘Spillover Effect’ from Economic Decline
Mook noted during the two recessions since 1990, credit unions have performed better during times of low interest rates. He said the Fed’s recent actions to reduce short-term interest rates “helps all of us. It is just a matter of reducing rates on our loans and jump-starting the economy.
“We are seeing a lot of interest in refis, but rates on 30-year fixed mortgages did not come down as much as the Fed cut short-term rates,” Mook continued. “Mortgages are off dramatically. We are involved in custom home building and construction loans, and we have seen people are holding onto their money and waiting to see where things are before starting the construction process. As a result, I expect to see our loan to share ratio decline.”
Andrews said Clark County CU also is dealing with a slowing economy. He said the credit union is seeing the need to be flexible with rates, both on the lending and deposit side.
“We try to be better than competitive on the deposit side. Even with very low rates, there is not a lot of demand for new cars right now. We have a CUSO that is an auto brokerage service, and it is a tough sell,” Andrews said.
Added Nevada FCU’s Beal: “We are seeing a spillover effect. A lot of people who are employed in real estate-related industries are losing their jobs or are on reduced income. That has caused an uptick in delinquencies and consumer charge-offs. The other thing we are seeing is people are spending less and are less frequently making major purchases. Car sales are off because folks can’t spend right now. The best way to describe it is an overall economic slowdown.”
Controlling The Bull Helps Stave Off The Bear
Clark County CU’s Andrews said one key to avoiding the foreclosure bug was a proactive step the credit union took during the height of the housing frenzy. From 2003 to 2005, some Las Vegas neighborhoods were experiencing staggering annual appreciation rates of 25% or even 50%.
“A couple years ago, when home prices were ramping up too far, too fast, we began limiting the percentage of loan-to-value that we would lend,” recalled Andrews. “We used to loan 100% loan-to-value, then we pulled back to 90% and then 80% because the prices just didn’t make sense. We also began looking at the first mortgage before we lent on a second, because so many loans were negative-amortization or interest-only loans on the first. I think that’s what saved us.” When someone defaults on a $500,000 loan, it does not mean the credit union lender just lost $500,000, Andrews said.
“The home value did not evaporate to zero, but we still might take a hit of $50,000 or $100,000–which no one wants to take. We have had to adjust our loan loss allowances not knowing what might still come.”
Clark County CU’s real estate lending volume is down (“just like everybody’s,” Andrews said). CCCU has a mixed portfolio, including commercial and consumer lending. The consumer side includes auto and unsecured, in addition to real estate.
“Commercial construction in Las Vegas is still strong, but it is flattening,” said Andrews. “Our portfolio is capped at 20% of assets, and we have no appetite to change that, so we don’t lend beyond a certain point. There is more demand in commercial than we can meet right now. We are being careful.”
