TUKWILA, Wash. -
Several analysts told the Credit Union Journal that while credit unions in large part have not originated the kinds of subprime mortgage loans now going sour for many consumers, credit unions could still feel the pain-including the pain from lost opportunities.
"I think credit unions can say, 'Good for us that we didn't get involved in this subprime lending,'" said Dan Green of Prime Alliance, Solutions, a mortgage CUSO. "But the worst thing for us to do would be to retreat. I believe credit unions will be feeling the downstream effects of all of this. Credit unions may not have been making these loans, but their members were getting them, and if you're a borrower, you're going to pay your mortgage first, so delinquency on consumers loans is a logical consequence of this."
The question is: how do credit unions reach out to its members in need of help while also minimizing the risk to the institution?
The answer is: very carefully and very creatively.
BALANCE, the San Francisco-based financial counseling service that has partnered with more than 400 credit unions, said it is now seeing CU members who are now in a pinch.
"Credit unions are looking at expanding their refinance options to help bail out their members," said Jeannine Moore, VP of marketing and business development of BALANCE. "They're not tightening their lending standards like a lot of banks are, but they are reviewing their criteria and staying more firmly within their existing guidelines."
For example, where once a credit union might have just done a drive-by appraisal of a house it is insisting on a full, formal appraisal to avoid overexposure to risk. Some other steps BALANCE has seen credit unions take:
* Modifying LTV on HELOCs.
* Considering implementing risk-based pricing after long saying it would not consider such pricing.
* Adding alternatives to payday loans that are priced higher than other products, but considerably below local payday lenders.
* Referring more members for housing counseling on foreclosure prevention.
Indeed, one of the trends Moore has observed: a shift in the number of people referred for early delinquency intervention (EDI) counseling as opposed to those referred for home-buying counseling.
"In the past six months, we've had about an equal number of calls regarding home purchase as we have regarding other housing issues-specifically, problems with making mortgage payments and monthly payments increasing as rates adjust," she related. "Last year during the same time frame, we had about twice as many calls about pre-purchase than other housing issues. More dramatically, though, in the past three months, for the first time, we've had more calls on other housing issues than pre-purchase-about 20% more."
In the same vein, more credit unions are requiring financial counseling-even going so far as to require certificates of completion-before making certain loans.
Moore said it is seeing far more problems from some of its banking partners than its credit unions. "Credit unions are really trying to help bail their members out, but they are finding they have to protect themselves a little bit more, too."
The good news is, in a lot of cases, credit unions are well positioned to come to the rescue.
"Subprime loans are not all one type of loan or one type of borrower," Green explained. "About 10% of those who get subprime loans didn't need a subprime loan, and we should be able to help those people. Some of them may have credit scores of 620 to 640, which is lower than we typically like to see, but Fannie Mae has extended its approval program, and some of those people should fit there, so you're not looking at a tremendous amount of risk."
Still, for as much as a credit union wants to reach out to its members, it's got to be realistic about how much it can do. "For a fair amount of members [in trouble with subprime loans] there's a something we can do for them. But you have to be very careful. There are some members you probably just can't help," Green said.
The even better news: there's a huge opportunity here for credit unions.
"What's behind this debacle? Greed. Investors [who bought these loans] didn't care about the credit quality, they just bought yield. Mortgage brokerages only get paid when a deal closes, so they focused on closing as many deals as possible with no future thought of whether the borrower can actually keep up with these loans," Green said. "But credit unions are all about helping their members. Now is the perfect time for credit unions to pound home the message that they are a trusted source for mortgages and loans in general."
Indeed, the message Prime Alliance has coined that a number of credit unions have been using: "We Fix Broken ARMs." Green said he is seeing a number of credit unions offering 103% loan-to-value products to help fix those broken ARMs. "This allows them to finance the total amount of the house but also the prepayment penalty that a lot of these ARMs have, because otherwise the member can't even afford to refinance."
The other reason there's a big opportunity for credit unions: other financial institutions that have been forced to slam the brakes on their lending have created a void that credit unions can fill.
"You see a lot of banks tightening their standards, and in the case of some, like Countrywide, it is both poignant and absolutely necessary," Green suggested. "But credit unions didn't play this game, so we don't need to tighten our standards, and in fact that would be the wrong response. As an industry, our delinquency rate is half the rate of the rest of the finance industry. This is a real opportunity for credit unions to step in. The best thing credit unions can do is be very proactive and let people know, 'we are in the business of lending, we are willing and able to lend.' The worst thing to do would be to retreat."
