The plunging real estate market has created a new question for credit unions — how to deal with members who are "walkaways."
The reference is to borrowers who "walk away" from their homes after the decline in housing prices pushed the value of the house far below the mortgage owed, creating what are more formally known as "strategic defaults." While that member was likely a "walkaway" from another lender, the issue for CUs is how to appropriately measure the credit risk that member actually presents.
On the whole, consumers who do their banking with a CU have a better relationship with their credit unions, so in general they aren't walking away as much" as those who have their mortgages with banks. That is the assessment of Bob Dorsa, president of the American Credit Union Mortgage Association, Las Vegas, in what would be called "Walkaway Ground Zero" if not for similar hot spots in California, Arizona and Florida. Several CUs in Nevada and California that spoke with Credit Union Journal have confirmed the walkaway phenomenon is not their biggest problem these days.
Even if walkaways from CUs are relatively rare, the issue of how welcoming credit unions should be to people who have defaulted elsewhere is a delicate one. As many credit unions that converted to community charters in the last decade-plus discovered, sometimes there is a good reason why Mr. Smith couldn't get a loan from a bank.
Greg Barnes, SVP of marketing for Nevada Federal Credit Union in Las Vegas, said a proactive mortgage workout policy has managed to head off most strategic defaults. However, as a community CU serving most of economically distressed southern Nevada, the possibility of that new member walking in the door being a bad credit risk is a sobering one.
Even though we sell all our loans on the secondary market, we are not at all keen about making mortgage loans to members who have just walked away from their obligations from another financial institution," Barnes told Credit Union Journal.
Nevada Fed's loan officers complete their due-diligence to weed out walkaways, if for no other reason it would not be able to sell the mortgage down the line. In some cases, he acknowledged, it is unavoidable that some may slip through the cracks.
"It is not a big concern about members walking from a bank to us after walking away," Barnes said. "All the credit unions in this town were heavy into mortgage lending during the boom, so there are probably just as many walking away from a credit union and testing a bank to see if they can get approved for a new mortgage."
Clark County CU serves city and county employees in the Las Vegas area, along with medical employees, public radio employees and a few other select groups. Matthew Becker, team leader (branch manager) for CCCU, said his credit union has a bit of an advantage over credit unions that serve an entire community.
"We work a little different than a lot of credit unions because we are a closed SEG group. Not anyone who is walking away from a bank can join," he pointed out.
Becker previously worked at a community credit union in Iowa, but he said coming from a town of 30,000 in the Midwest has meant adjusting to different marketing conditions in Las Vegas. "There is a lot of turnover here because of people moving."
To keep turnover from turning into deadbeats, Clark County CU requires a minimum credit score of 550 for opening a new account, with a minimum deposit of $50. Becker said there is an ongoing marketing campaign in place that is designed to recruit good members.
"We have an outside marketer who goes to local, county and municipal employers during new employee orientation to let them know about the credit union," he explained. "In addition to credit scores, we pull several other reports to make sure it is a viable member. I wouldn't say it is strict, but we make sure they are potentially good members.
"There definitely is more interest, and people are becoming aware of the difference between credit unions and banks," he continued. "People appreciate the fact there are fundamental differences between a bank and a nonprofit."
Wally Murray, president and CEO of Greater Nevada Credit Union, Carson City, Nev., said there are two sides to the question of how to treat a potential new member who might have walked away.
"The entire reason credit unions exist is to serve consumers who find that traditional banks and other financial services providers do not offer either the products, pricing or level of service those people need," he began.
"This rationale remains true during both good economic times and more challenging periods, as well. Therefore, it should not be surprising that during times when for-profit banks have increased pressures on their bottom lines and seek to generate more revenue from their customers, increasing numbers of those people might turn to credit unions."
Murray continued, GNCU is under an obligation "to serve all of our members in a smart manner that does not expose the institution to undue risk, regardless of whether the member is new to the credit union or not."