SAN DIEGO - First it boomed. Then it crashed. And credit unions have been left to pick up the pieces.
The real estate market balloon–especially in California, Las Vegas, Florida and other markets, inflated the confidence of many members and, as a result, many credit unions’ loan portfolios. But the sound made by the burst of that balloon was the sound of disappearing equity, deflating more than just member confidence but the collateral credit unions were counting on to secure those loans.
The question for many CUs now: how to handle credit lines that are still open but based upon what are often significantly higher home values.
“One of the first things we did was a review of property values for all of our home equity lines of credit,” said Julie Bennet, lending manager at Cabrillo Credit Union here. “We pulled a robust AVM product for all outstanding HELOCs. Our policy allows for 80% LTV on HELOCs.”
Those steps gave the $165-million credit union a little cushion, Bennet said. “But we are still seeing property values dropping 20% or more in some areas,” she said. “After the review we found that many were well over 80% LTV.”
Cabrillo Credit Union blocked the credit lines on those accounts and sent letters to affected members informing them of the change, Bennet told Credit Union Journal. “I think it was expected by most members as we did not receive much negative feedback,” she said.
Before the drop in housing value, Cabrillo CU’s home equity product line included interest-only options. No more. “We are now only offering traditional,” Bennet said. “We have taken out the interest-only product.”
Keeping A Sharp Eye
In Sacramento, Calif., which has seen significant depreciation in home values and skyrocketing foreclosures, The Golden1 Credit Union is keeping a sharp eye on its outstanding equity loans, said Curtis Dair, SVP of lending.
“We’ve tightened our guidelines to really protect ourselves against the declining market,” he said, “but we are still writing home equity loans.”
“We also want to protect our members by not putting them in a position of overextending themselves,” added Donna Bland, SVP and CFO of the $6-billion Golden 1. “We are looking at our current loans and if market rates have gone down, we may need to reduce available line limits.”
“I do think it’s in the best interest of members to not place them in a position of borrowing more than they should,” Dair agreed, adding that to compensate there are many alternatives to an equity line.
“There are still very good auto rates,” she said. “And there are personal loans and credit cards. We will also work with our members to analyze the value of their specific home.”
For one credit union in Las Vegas, an earlier underwriting decision is now paying dividends. Tom Ernsperger, SVP-loan administration for the $820-million Nevada Credit Union, said that his CU is “faring quite well.”
“Our home equity loan portfolio has traditionally featured more closed-end second-mortgage loans than HELOCs,” he said. “In the case of our closed-end loans, we never got involved in the high loan-to-value craze of a few years ago. Thus, while we have not been immune to the effects of the local economy, even with the reduction in local home values, we find most of our loans continue to perform well with adequate collateral value.”
Like Cabrillo Credit Union, Nevada CU has been reviewing its current open lines.
Still Performing Well
“However, we have found the overwhelming majority of them continue to perform well, regardless of their current property value,” Ernsperger said. “The index to which our HELOCs is tied has not been as volatile as the index to which many other adjustable-rate first-mortgage loans have been tied, which has helped these borrowers avoid drastic payment changes.”
Ernsperger said NCU has seen a decrease in the number of requests for HELOCs as people may be realizing their property values simply won’t support a loan.
A Prudent Review
In Fort Lauderdale, Fla., City County Credit Union has more than 1,100 HELOCs with balances, said Lloyd Gill, EVP/COO.“While we have had very minimal delinquency in our HELOC portfolio, we have decided it would be prudent to undertake a review of all open lines to determine our exposure, if any,” he said.
“We are undertaking a manual review of every HELOC,” he said. “This includes a review of current property value and a credit bureau report.”
When this is complete, the CU will determine what course of action to take, Gill said.
“This may include reducing credit limits in cases where the LTV is excessively high,” he said.
“We are still offering HELOCs, however, according to Money Magazine, property values in South Florida are predicted to continue declining through the second quarter of 2010,” Gill continued. “Accordingly, we have reduced our maximum LTV from 85% to 70% so that loans we make today will still be well secured if values do decline further.”
In addition, the $287-million City County CU mailed all members with a real estate loan detailed information about assistance available, including credit counseling programs and loan modifications, Gill said. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com
