OCEAN CITY, Md. -- As the housing market continues its significant slowdown and the subprime market crashes, credit unions will likely fair better than other lenders but they should also look carefully at the mortgage debt they maybe trying to refinance for their members.
As credit unions tend to be more conservatively run than other lenders, they are not as steeped in the high loan-to-value, low credit score, stated income subprime loans that have been the bane of the market, according to Scott Toler of the Credit Union Mortgage Association. "We've all seen that foreclosures are way up," he said during an education session at the Maryland & D.C. Credit Union Association's Annual Meeting last week. "That's because people were put into loans they shouldn't be in."
According to Peggy Deane of Member Options, LLC, foreclosures in Virginia have doubled. "On the credit union side, you probably won't experience that because credit unions are famous for having very sound mortgages and very loyal members," she said.
So long as credit unions steered away from the stated income loans in particular, they should weather the storm well. Toler emphasized that unless someone is self-employed, there is no reason they should not be able to prove their income. Some lenders allowed borrowers to do it anyway to essentially "let them lie about their income."
"The boom is definitely over and I can tell you when it ended. It ended in August 2005," Deane said. The real estate market is simply normalizing, she said. "What was happening over the last four or five years just isn't normal," Deane explained, with home values rising in double-digit percentages. Now the hottest markets are the "biggest losers," she said.
On one hand, the situation has created opportunity for those people looking to get into lower-priced housing while rates are still low, which is a positive. However, as values decline, which they are doing in 25% of markets, credit unions could have difficulty helping their members get out of those bad loans because the amount they owe could now be a lot more than what the house is worth. While credit unions might want to help their members out of these bad loans, they really need to be cautious of taking on the bad debt of a troubled industry.
Toler added, "The bad news is it gets worse before it gets better."
The quality of the appraisals behind the mortgages is critical to look at as refinancing remains active. "We and the whole mortgage market will look a little bit closer at appraisals," Toler said.
This goes for home equity loans as well. Credit unions that keep their home equities in portfolio ought to give them a second look because they could feel the impact of the rising foreclosure rates depending on how liberal the credit union's underwriting was as well as the priority lien holder, according to Deane.
Generally speaking Toler said of the nontraditional mortgages, "You're going to see the qualifications for these loans tighten up."