Credit Unions Staying at ARMs-Length from Skyrocketing Foreclosure Rates Through Fixed-Rate Mortgages and Member Education
IRVINE, Calif. -- Foreclosure numbers for 2006 are in and they paint a worrisome picture. More than 1.2 million foreclosure filings were reported nationwide in 2006, a 42% leap from the previous year, according to the 2006 U.S. Foreclosure Market Report released by RealtyTrac, an online marketplace for foreclosure properties. That's a rate of one foreclosure filing for every 92 households.
James Saccacio, CEO of RealtyTrac, attributed the increase to the general slowing of housing sales and the impact of "dramatically increasing" monthly mortgage payments for homeowners that opted for adjustable rate and subprime mortgages.
Despite the doom and gloom, credit unions were largely unaffected, due in part to a continued effort to provide more conservative and affordable products coupled with member education regarding the various mortgage products on the market.
"Over the last five years we've probably averaged less than one foreclosure per year," said Steve Fagan, vice president of mortgage lending at $1.7 billion Texans Credit Union in Richardson, Texas. "We think that's because we haven't done any of the aggressive option ARM-type programs. We have traditional underwriting and perhaps we're more conservative than many when we underwrite for the membership."
RealtyTrac listed Texas reporting 156,876 foreclosure filings in 2006, the most of any state and 13% of the national total. Texans CU holds a mortgage portfolio of $325 million with approximately $7 million to $10 million per month on the books, Fagan said. Last year it added 125 total mortgages and was not impacted by the foreclosure boom thanks to a focus on fixed-rate, some modest ARM products, and its membership base remaining stable in employment.
As of January, Texans had 15 one-year ARMs, 19 three-year ARMs, and 46 five-year ARMs, representing a relatively small number of ARMs to fixed, Fagan explained. When the CU has taken the time to explain to members all the different mortgage instruments they almost invariably choose the fixed rate, he added.
"I think there's been a lot of people who have been misinformed by the lending industry over the years and they've gotten into things that maybe they didn't fully understand," Fagan said. "We don't have straight commission loan officers like a lot of mortgage banker shops do. It puts pressure on closing the loan as opposed to the member-type service that we try to give. We want the loans to perform on the books and we want the member to be happy, not get over-extended, stay here and come do business with us again."
It has also been business as usual in the mortgage lending department for the $3.7 billion Ogden, Utah-based America First Credit Union. Utah saw its share of problems last year as 1.7% of households, or one in 59, filed for foreclosure, but Mortgage Servicing Department Manager Larry Kano agreed with Fagan that members' preference toward fixed-rate products has helped temper the local and national climate.
"We're just not seeing the same level of foreclosures as the state of national is experiencing," Kano said. "We don't do a lot of ARMs and it seems like a lot of the foreclosures out there are the result of ARMs. Less than 5% of our business has been adjustable rates." Factoring in Fraud
Of course, the rising number of foreclosures is a product of more than just an increase in ARMs. In Colorado, licensing and registration issues and appraisal fraud have helped catapult it to the top of RealtyTrac's report, with a 3% rate of foreclosure for the entire state's households.
Prior to 2007, Colorado was one of only two states that did not require mortgage brokers to be licensed or registered--literally a person could walk out of jail in Kansas, cross the border into Colorado and open up a mortgage brokerage business, explained Jon Paukovich, director of mortgage lending at Colorado Springs-based Ent Federal Credit Union. Many observers believe that was the cause of much of the mortgage fraud and foreclosures in the state, Paukovich said.
The problem has been further compounded since many going through foreclosure have obtained either a stated income loan or a "no doc" loan, added Bill Vogeney, Ent's senior vice president and chief lending officer. Ten years ago these loans existed primarily for people with excellent credit who were self-employed business people. They had excellent assets, but may have had a tough time verifying their income since they were aggressive with their write-offs and expenses with their business.
"In the last three to fours years it's become the darling of the subprime market where now people with weaker credit and without significant assets have been offered these stated income or no doc loans," Vogeney said. "They're jokingly referred to in the industry as the 'liar's loan' but it's allowed a lot of people to buy a house that they may not have been able to afford otherwise."
He offered the example of a mortgage broker working with a customer seeking to buy a $300,000 house, but who can only afford $175,000. Instead of turning him down, the broker could put him in that home with a stated income product. The loan gets approved but the borrower has little chance of ever repaying that loan over a long period of time, said Vogeney.
Ent primarily underwrites to Fannie Mae guidelines and offers a Fannie Mae suite of products. The CU has never extended its credit guidelines beyond that into the subprime area, Paukovich said.
In qualifying borrowers Ent has come across situations where people signed up for their first mortgages elsewhere and relied on creative financing to qualify. Their loan and debt-to-income may appear fine, but the CU attempts to determine the terms of the first mortgage. If someone had to use an Option-ARM and signed for a $200,000 first mortgage with a $700 payment in order to qualify, Ent will make an effort to qualify them on a more normal payment. Vogeney admitted that as a result, the CU has turned down some loans it felt that people would not be able to repay.
"We want to educate our members. Many people that got an exotic product the last few years can't even refinance out of it because their home value has leveled off or declined," Paukovich said.
An element of that education deals with appraisal fraud. The Colorado State Attorney General is looking at the issue, but to give an idea of its effect, Vogeney cited one example where an Ent member had refinanced six to eight months ago and received an appraisal of $185,000. The appraiser used properties a couple of miles away where there were homes within walking distance of the member's home that sold for $145,000-$150,000. The member went to a subprime lender and got 100% cash-out refinance, paid an origination fee, paid points and was sold a loan with a 3% pre-payment penalty.
"Overall [increased foreclosure rates] haven't really impacted us here in Colorado Springs," Vogeney said. "We didn't see the rapid appreciation experienced by the greater Denver area and we're not seeing that rate shock that sets in with many of those that selected exotic mortgage products."
While not the bulk of its business, $2.75 billion Desert Schools Federal Credit Union in Phoenix does offer quite a few variable rate products and has seen a rise in popularity among the 3/1, 5/1, 7/1 ARMs and also home equity lines of credit. It has also witnessed some of the early signals of Arizona's foreclosure climate--27,886 total in 2006 according to RealtyTrac figures.
It is seeing almost twice the delinquency rate in the variable rate versus fixed-rate, noted Robin O'Rorke, vice president and chief lending officer. With that in mind, Desert Schools' foreclosure numbers are still very low--less than half of 1%. Some members are getting a little bit late with payments, O'Rorke added, but the CU has not had many properties that it has had to take back.
Desert Schools has decided to take an anticipatory approach to the market by creating the Foreclosure Prevention Loan, similar to an accommodation loan, to try and help members stay in their homes. Another method is to move members out of home equity loans that are based on the prime rate.
"With prime having gone up so much, a dozen times or so, we're trying to be proactive and offer a home equity loan that it not prime-based. So we'll call our members that have our current products and try to get them into this new product. Both this new home equity product and the Foreclosure Prevention product are currently in the works and are just going to our ALM committee in February."
O'Rorke doesn't ascribe to the theory that since CUs are now successfully weathering the foreclosure storm they are imminently prepared for the future.
"The effect is pretty insignificant right now," Rorke said, "but we definitely have to keep our eye on it because we don't think that the worst is over." --firstname.lastname@example.org