CUs Get the Smack-Down on Cram-Downs
Even as real property values in many areas decline, credit unions are helping out where they can. Continuing to lend to existing members or incoming members is critical to credit unions' future in the financial services marketplace. As they cultivate loyal relationships with their new and current members, they will also gain in assets and influence that can help them out when Washington tramples the seeds credit unions are toiling to sow.
I cannot imagine what Congress is thinking with its bankruptcy reform legislation that would reinstate cram-downs. As it stands right now, the bill would provide bankruptcy judges the discretion to rewrite the terms of mortgage loans for borrowers filing for Chapter 13 bankruptcy protection; Chapter 13 is when borrowers are required to repay a portion of their debts back to their lenders.
Credit unions are already going out on a limb to try to get appropriate borrowers into homes that they aren't 100% certain what they will be worth the day after closing. Now the government is trying to tell them that an individual judge knows better how to underwrite loans than the credit unions actually doing the lending. Judges, highly skilled and knowledgeable as they may be on the bench, have no training in loan underwriting and have no business interfering with it.
Certainly something needs to be done to right the injustices inflicted upon unwitting borrowers by those lenders that made irresponsible-and at times fraudulent-subprime mortgages, but finding a bright line for dividing the bad apples from the shining red ones is very difficult. Subprime loans can make complete sense for those who are wealthy enough to expect better returns on the cash they could have put into the real estate. Additionally, even lenders that made seemingly reasonable loans a few years backcould not have foreseen the totality of the consequences of the market crash. These are some of the same ARMs that are resetting right now that homeowners may no longer be able to afford.
One of the things that drives me batty about Congress is that it typically fails to act unless there is a crisis. It is not just Monday morning quarterbacking to say that lawmakers could have at the very least made this economic rut a little less deep. The Raines should have been pulled taut on the GSEs long before they were; mortgage brokers should have been subject to regulatory oversight; mortgages loan applications lacking proof of income never should have made it through underwriting; and the list goes on and on.
If credit unions, or any other sensible lender, cannot rely on the underlying value of the mortgage at the time it was made, they will have to increase provisioning, which in turn means less capital with which to serve their members and customers, and it's reflected in the price of the loan.
We all feel for those borrowers who are upside down in their loans because of plummeting property values, but that does not mean they shouldn't have to pay back the money they borrowed. Lenders' lost expected revenue will be made up elsewhere, which means everyone else who banks at the institution.
Everyone is empathetic to borrowers whose ARMs and I/Os are readjusting, but so long as they were aware that was a possibility, the borrower bears the responsibility.
And, for those who are losing their jobs or have emergency medical expenses, we are sympathetic; these are the people that bankruptcy was intended to protect. These are the people who deserve a little hand up, especially right now. These are the people lenders should be willing to work with, but if bankruptcy turns out to be the best solution, so be it.
Cram-downs are just one of the many congressional agenda items that credit unions need to be fighting right now, unless they are performed in a reasonable manner. Also to come: regulatory consolidation, overzealous credit card protections for borrowers, interchange limits, the Community Reinvestment Act, possible taxation and much more. What credit unions need to place on the congressional agenda is expanded access to capital and broader business lending powers.
This is why developing a relationship with your representatives in Congress is so important. As you are all considering necessary budgetary cut backs, particularly in travel, CUNA's Governmental Affairs Conference this month and NAFCU's Congressional Caucus in the fall should not fall victim. If necessary, send less staff but make up for it with in-district work. The credit union industry as we know it could very well be at stake.
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