Agency Seeking To Strike Balance Between Flexibility & Consistency
The recent upheavals in the mortgage market and the credit markets broadly have garnered an extraordinary amount of attention in the media, and with good reason. Ripple effects throughout the economy are now being manifested by slower growth and a dramatic drop in consumer spending. On the housing side of the ledger, increases in the number of foreclosures, volatility in interest rates and sharp declines in housing starts and, in some markets, housing prices, have all contributed to greater awareness of the need for careful and prudent mortgage lending by all participants in the market, including credit unions.
Against this backdrop the National Credit Union Administration is working to achieve a sensible balance between two elements of a supervisory regime that, if not properly understood, could be considered contradictory: flexibility and consistency. My increased attention to this important responsibility area over the last few months leads me to believe that NCUA is succeeding in these efforts.
The Fundamentals Of Safety & Soundness
NCUA supervises mortgage lending through the examination process at federal credit unions. At the core of NCUA’s exam process is a fundamental focus on safe and sound operations, and interaction between the examiner and the credit union. NCUA’s Examiner’s Guide has been and remains the most coherent and reliable roadmap for this process.
This ensures a credit union’s lending practices remain safe and sound, and has contributed to an overall positive picture of the federal credit union industry’s mortgage lending activities in the midst of the turmoil experienced by other lenders. It also enables credit union boards and lending professionals to proceed with the knowledge of established practices and precedents against which they will be assessed by their NCUA examiner.
But this process is not an unchanging and inflexible regulatory roadblock. NCUA issues guidance in the form of Letters to Credit Unions that ensure our examination process remains sufficiently able to respond to changing market conditions.
NCUA regularly issues guidance to outline risk-based lending concepts. Examiners routinely discuss the guidance set forth in these letters with credit union management and evaluate their responses through the examination and supervision function. Beginning in 1995, with a letter regarding risk-based lending, and continuing over the past 13 years, NCUA has provided credit unions with specific guidance on how to manage subprime and risk-based mortgage lending programs, as well as conventional mortgage portfolios.
There are several elements of NCUA’s strong supervisory approach. NCUA has developed questionnaires that specifically address all facets of real estate lending including loan documentation, record keeping of the mortgages, the appraisal process, and insurance and escrow analysis. Examiners carefully review each credit union’s mortgage program for compliance with federal compliance laws, specific NCUA regulatory limits, and with safety and soundness standards in relationship to the amount of risk exposure at the applicable credit union. Recommendations for corrective action are incorporated in the written examination report provided to the credit union’s board of directors.
NCUA does not mandate specific qualification standards for mortgage underwriting. While the Interagency Statement on Subprime Mortgage Lending establishes minimum underwriting requirements in the federally insured mortgage market, it also allows institutions to vary their standards relative to their level of risk tolerance, experience, and risk management structure. Qualification standards will vary from institution to institution, and NCUA assesses the reasonableness of qualification standards by considering loan policies in relation to the individual situation in each credit union.
So, Just How Are Credit Unions Doing?
I am frequently asked whether the credit union industry is generally faring better than others, and if so, why? First, it is essential to note that while credit union real estate lending is an important facet of an individual credit union’s member service outreach, credit unions comprise a very small portion of the nation’s overall mortgage lending. Credit unions make approximately 2.1% of all mortgage loans in the marketplace, and about 9% of mortgage loans outstanding in all federally insured depository institutions. Approximately 58% of federally insured credit unions offer mortgage loans to their members.
This proactivity, combined with the naturally conservative approach that most credit unions take toward lending to their members, has kept credit unions financially strong during this mortgage-related turbulence.
Although financial markets are fluctuating in part because of volatile subprime mortgages, federal credit unions remain relatively stable. NCUA has seen some increase in mortgage and loan delinquencies and foreclosures, albeit on a relatively small scale. Total real estate loans expanded 11% to $271.1 billion in 2007. Real estate loans delinquent two months or more grew from 0.34 to 0.67% and foreclosed real estate increased to $332 million, representing 0.12% of total real estate loans as of Dec. 31, 2007.
While any increase is undesirable, federally insured credit unions’ loan delinquency ratio increased 0.25 basis point, up from .68 to .93% during 2007. I commend credit union managers and urge they remain vigilant stewards providing responsible lending based on solid financial underwriting.
Reviewing other trends in mortgage loans granted in 2007, fixed rate first mortgage loans increased 19.1% while total balloon/hybrid first mortgage loans increased 1.2%, and total adjustable rate first mortgage loans declined 8.9%, illustrating a move to fixed rate loans.
I would be remiss if I did not address some of the problems NCUA has seen with a few credit unions who have encountered difficulties with their mortgage lending activities. Several credit unions that were conserved in 2007 were directly traceable to volatility in the housing market and attendant imprudent decisions by certain credit unions to engage in what turned out to be unacceptably risky ventures.
The specific cases are isolated problems and were related to a specific situation in the Florida real estate market that involved speculative buying on the part of consumers. The loans in general were not primary residences, and are what we would classify as investment property. Our on-going review of the loan files on these cases indicates well in excess of 80% of the loans were investment property. In each case, NCUA took decisive action to protect consumers and the National Credit Union Share Insurance Fund.
The credit union industry remains a pro-consumer industry. The fact that CUs have less than 2% of their total real estate portfolio in the interest only and payment option first mortgages indicates CUs identified the potential consumer problems with these products and generally avoided entering this high risk market.
As NCUA vice chairman, I firmly believe that the best way we as a regulator can assist the credit union industry in serving its member home mortgage needs is to maintain a safe, sound and vibrant regulatory regime that builds confidence in the system.
I look forward to continuing to work with you in the industry to achieve this worthy goal, and surpass the already high standards we have created.
Rodney Hood is vice chairman of NCUA.