SAN DIMAS, Calif. -- A year ago you could find a debate on whether or not the housing market was on the cusp of a significant slide. With sales down and inventories up, the picture painted is not entirely bleak as credit unions have a distinct opportunity to address the market through refinancing products.
"The market for new purchase mortgages will be declining," forecast Dwight Johnston, vice president, economic and market research at WesCorp. "There will be a continued strong demand for refinancing. It's a real opportunity for credit unions to be there and to be there with some reasonable and affordable products. I think if they promote being there for refinancing it will prove to be beneficial to both the credit unions and their members."
Refinancing products will be in demand due to a number of factors prevalent in the current housing market. For instance, Johnston said, in California there was a report that default notices are going out at a 100% increase over last year. The average loan age was only 14 months so people that are getting in trouble are the ones that bought homes more recently and during the peak in prices. They bought homes mostly with loans and they weren't prepared for the rate adjustments. Since they probably also put little or nothing down that gives them little or no incentive to hold on to the home, Johnston added.
Johnston also cited an example from Business Week, that discussed a half-million dollar mortgage taken out two years ago. The payment on that, using an option-ARM with the minimum payment, would have been $1,600 per month. In five months, the minimum payments were capped out and the owners would have had to make a full normal payment, which would total $4,100. The scenario is not that uncommon. During the last 18 months through June 2006, there was approximately 263 million of this type of product.
"It sounds like a nice thing," Johnston said. "If you have a cash flow problem you can pay the minimum and then another month you can make a larger payment. We've found that when people have taken out those option-ARMs during that time frame, 80% have done nothing but make that minimum payment. Those affordability products--interest-only ARMs, interest-only fixed and some of the option-ARMs--are the most dangerous. Those are the ones that have caps and we're finding that since rates have moved up quickly, those caps are very close to being reached."
The good news is that credit unions didn't really lean heavily on affordability products, according to Johnston. Credit unions have done a much better job than the big lenders as far as qualifying people based on some upward adjustments. Many of the big lenders are now admitting that they did not qualify people based on the normal upward adjustment interest rates and just basically qualified them, Johnston added. Add to that the alluring rapid turnaround time for online approvals of Lo Doc and No Doc loans--also known as "liar loans" since a person is required to state their income, but not prove it--and the big lenders were making loans to under-qualified people at the highest rates.
"Over the last 18 months the Loc Doc or No Doc loans have been as much as 80% [of applications] that went through. A lot of people are finding out that the investors and the 'flippers' took out liar loans and those are the people that are part of the reason for the higher foreclosure rate."
When it comes to refinancing, credit unions need to do what they do best, according to Johnston.
"They've already been taking care of their members by keeping in mind the upward rate adjustments. With refinancing they have to continue to best identify and address the needs of the individual rather than get hooked solely on what's happening with the market in the moment." --firstname.lastname@example.org