ARLINGTON, Va. -
Credit Union Journal talked with several CU economists about how the tumbling subprime mortgage market could have an effect on credit unions and their members, and while the opinions varied, they all agreed on this: it's a trend worth watching.
"Yes there will be a trickle-down effect; no-I don't know how much," said Dr. Tun Wai, chief economist and director of research for NAFCU.
Brian Turner, manager of advisory services for Southwest Corporate Investment Services, said that before one can assess the current subprime market, "you have to see from where we came."
"Back in the 80s, ARM-originations were on the increase as borrowers were enticed with teaser rates sometimes 125 to 200 bps below prevailing fixed rates," he said. "This same phenomenon recurred a few years ago in the historical refinancings of 2003 to 2005. In both cases, many borrowers were caught short when their loans repriced to levels, which made it unaffordable. What is different now is while in the 80s, borrowers were required to put at last 20% down to qualify for their ARM, no down payment was required from more recent borrowers-doubling the adverse exposure to both lender and borrowers."
At present, subprime mortgages account for 55% of total ARMs but only 13% of total mortgages, Turner said. He added that about 75% of all subprime mortgages were originated after 2003-versus 86% of total mortgages outstanding.
"Currently, about 65% of homeowners have a mortgage loan, 75% of mortgage-holders have fixed-rate mortgages and approximately 98.7% of all mortgage-borrowers are current on their payments," Turner said. "So there's considerable strength in the current mortgage sector of the economy but one seems to want to share that."
Who's Kidding Whom?
Wai, who recently spoke about this very subject to a group of credit union leaders, said that after the discussion one credit union leader approached him to tell him she doesn't have to worry about subprime mortgages, since her credit union does not practice subprime lending.
"I said 'Are you kidding me? Do you not understand the implications of this?'" Wai said. "It's the indirect effect that you have to worry about."
Wai said that the issue of subprime mortgages will not have a big direct impact, as most credit unions do not practice subprime mortgages themselves.
"The Federal Reserve collects data on mortgage," he said. "When you look at that data, basically from taking a look at various rates being charged-if you have a loan on the books that happens to be significantly higher than benchmark you have to report it. And credit unions don't do that much."
But again, Wai stressed that doesn't mean credit unions aren't affected by the issue. "There is a secondary impact," he said. "That secondary impact couple be a significant impact here. It's the ripple effect."
It's a sentiment shared by Dave Colby, chief economist for CUNA Mutual Group. "It's amazing how such a small segment of the market is blowing up the whole market," he said.
Colby said that so far the industry has not seen a lot of fall-out onto any other loans, including vehicle loans. "But it's really too soon to tell," he said.
Dwight Johnston, vice president of economic and market research for WesCorp, in San Dimas, Calif., disagrees, saying that in addition to him not being "aware of any credit unions that have been participating in subprime lending," he is also aware of very few credit union members involved in subprime lending outside their credit union.
"Credit unions never really participated in these practices," agreed Dave Colby, chief economist for CUNA Mutual Group. "If anything, you can accuse us of being too squeaky clean."
Taking Out The Trash?
But that doesn't mean members of credit unions are not receiving subprime loans from other venues, Colby said.
"These loans are pure junk loans for those with crap credit," Colby said. "The loans are intended entirely on flipping them."
In these cases, Colby said there is "no way credit unions should be bailing them out."
But for those who have good jobs and good collateral and may have been taken advantage of by a subprime lender, Colby said that "credit unions can step in and make a difference."
"Credit unions can help them through a tough period," he said.
Johnston agreed. "Credit unions can help these people out," he said.
It's a sentiment shared by Wai, who advised CU members who may be in this situation to speak to their credit union.
"Credit unions are known for bending over backward for their members," he said. "There are loan programs [members] can utilize. A lot of credit unions will likely be able to renegotiate the loan. They will just make sure the member is in good standing."
It is important for members to know that their credit unions will usually delay payments on existing loans with the CU during financial difficulties, Wai said. "I would recommend if you are in that situation to talk to your credit union," he said. "The credit union will listen to you and give you advice."
The Turn Of The Screw
But credit unions aren't the only ones seeking to help these victims of subprime lending, Turner said.
"To stem the tide of new subprime originations, credit standards are finally being revisited," he said. "Both Fannie Mae and Freddie Mac have recently come out with new underwriting guidelines requiring evaluating borrower's ability to pay over repricing periods, limiting teasers, income verification, etc. In assessing current subprime mortgage-holders, Fannie Mae has concluded that a good number could currently qualify for a more conventional mortgage-although I'm not sure what has significantly changed in these borrowers' credit status. If true, the overall mortgage sector is basically left with a market exposure of about 7% of total mortgages outstanding."
As for credit unions, Wai said the best advice he can to give them is "don't get involved."
"Follow best practices," he said. "When making mortgage loans, there are standards. You have to be careful. And I would say if you haven't done it yet, think about it. And if you have done it, reassess the situation."
Wai also warns credit unions to "be prepared for charge-offs and delinquencies that may occur."
Because credit unions usually have very few charge-offs or severe delinquencies, Wai said that luckily there is room within credit unions to take this hit, but of course that doesn't mean it's something any credit union would want.
"When the economy slows down, these are concerns most financial institutions must face," he said.
The Credit Union Silver Lining
Colby said that credit unions can use this issue of subprime lending to their advantage.
"Right now the only game in town is first-rate fixed mortgages," he said. "And credit unions have been adding them quite a bit. There are tons of opportunities for credit unions from this. If anything, this may be an opportunity to prove that the credit-union industry is different. Credit unions have an opportunity to help members. We may see another re-fi boom where members are dropping their adjustable rate and going to a fixed rate."
Johnston said that there is another opportunity for credit unions: "Potential high-end market people" are having trouble getting a mortgage rate with which they are comfortable as less people are buying homes at present, which leads to another opportunity for the CU industry.
"As far as credit unions, some of the competition has gone away," said Johnston, due to mortgage firms closing down.
Turner agreed that the subprime lending issue leads to more opportunity for CUs. "By reviewing the credit union industry's low charge-off rate and the fact that credit unions are more prone to retain their originations than most, natural-person credit unions have not sustained the type of losses that others have incurred during the subprime market chaos. In fact, most are in a stronger position to increase their mortgage loan activities with $250 billion in mortgages and relatively little delinquency. If credit union total holdings in mortgage ARMs is less than 11% of total loans, the prevailing delinquency performance and the conservative nature of the industry as a whole, some exposure does exist, natural-person credit unions appear to have less subprime market exposure then most."
Turner sees a light at the end of the tunnel. "Although most likely the storm hasn't passed, ironically, during the past few months, as investors worried about subprime ramifications, mortgage spreads have widened dramatically on conforming 15- and 30-year mortgage assets, particularly pass-through and planned-structure securities.
