Just a few weeks into his new job as vice president of mortgage lending for the $1.3 billion Community First Credit Union, Glen Ogden was bothered that his team was turning away new business. Members were calling about the first-time homebuyer federal tax credit, asking if they could use it as a down payment.
But, federal law prohibits the practice, and the Appleton, Wis.-based credit union didn't have a suitable product to fill the gap.
"We needed a program that would allow them to get into the home with a 5% down payment that we lent them and allow them to pay off that amount with the tax credit once they received it," he said.
Creating a loan to finance the 5% down payment at 0% interest was easy enough. In Appleton, located in east central Wisconsin about 50 miles south of Green Bay, starter homes range from $60,000 to $120,000. So, the $8,000 credit would be more than enough to cover the down payment. If a borrower didn't use his or her tax return to pay off the amount, the loan could roll into a second mortgage with standard terms and payments.
It looked like all systems were go, except for one major hurdle: mortgage insurance. Ogden couldn't find one single mortgage insurance company willing to cover the product. In this day and age, 100% financed mortgages are considered too risky, especially for first-time homebuyers.
Other executives may have shrugged their shoulders, admitted defeat and turned their attention to the next project. But Ogden didn't give up.
Instead, he investigated self-insurance.
"After all, what is insurance?" he said. "It's paying a premium to hedge a risk. So, I thought, what if I add a premium to the interest rate and hold it on the books?"
As a basic example, Odgen said he would add 50 basis points to the interest rate, and set it aside as a first-loss category in the event the credit union does experience a loss.
"Not in a true reserve account, but noted," he added.
Community First also charged a $500 origination fee, which it doesn't typically charge members. Those funds were earmarked as reserves to guard against losses.
"Basically, we set aside the buffer in our own records, it wasn't technically on the books," he said. "We are making a higher yield on these loans, so if we do take a loss, it comes from there."
Since March 2008, Community First has funded nearly 70 mortgages for $7 million, and not one has gone delinquent.
To qualify, members were required to provide three years of tax returns to prove no homeownership. And mortgage loan officers used common sense to vet borrowers.
"When we got applications in the door from 20-somethings that had 1040EZ forms, we knew these were the first time homebuyers we wanted," he said.
Even after the April 15 income tax return deadline, Community First continued to promote "Stimulus Mortgages," advising members to file amended 2008 tax returns through Nov. 30, 2009, which allowed them to receive the credit retroactively.
Retroactive tax returns not only ensured the loan would be repaid quickly, but members would also receive the full $8,000 credit because they had already settled up with the IRS for 2008.
Mortgages that closed before Nov. 30, 2008, have until April 15, 2009, to get the no-interest deal. Those who have closed since then have until Oct. 1, 2010, to pay in full before the loan coverts to a second mortgage.
Ogden said his team will even let the due date slide a little bit if the IRS delays the process.
"These are great members who have paid on time, and we've formed some great new relationships, so we're not looking to come down heavy handed," he said.
The rest of the loan is a five-year adjustable-rate mortgage, which Ogden said wasn't a hard sale, considering the bad press adjustable rate products have received since the bubble burst.
"We knew they would be concerned about ARMs and bad press, so part of our ad campaign was to stress that this is a good, solid and safe conforming product," he said.
After one year, borrowers may refinance at appraised value, which has rising slightly in the Appleton area. Only one member refused the program because of the adjustable rate and that was because his father was dead set against it, he said. Many Gen-Y borrowers brought their parents along to consult during the loan process.
Marketing was brought into the loop once the program was set. Community First's in-house marketing team created sales materials for members and real estate agents and scripting for staff.
Every real estate agent in the state of Wisconsin received flyers, and local agents were gifted chocolate houses with the First Community logo and were given the opportunity to draw house keys from a bag to claim promotional prizes. One real estate agent even forwarded a promotional e-mail to his state Realtors office, which in turn broadcast the promotion to all members statewide.
"As a result of our efforts, we made some great inroads into real estate offices," Ogden said. "Some have their own mortgage brokerage firms, and even they let us in."
The program has been so successful, those same mortgage insurers, who, last year, wouldn't touch the program, are now expressing an interest in covering it.
Peer pressure could have also played a role in the mortgage insurers' changes of heart. A video profiling Seth and Lindsey Gregory, Community First members who took advantage of Stimulus Mortgage, was featured at several credit union industry events last year. Nearly every credit union executive who attended an organizational meeting last year knows the story of the Gregory's, a young couple who had saved up $15,000 for a down payment but had instead used the funds to adopt their son.
The video was created in-house by Community First's marketing department, including a contract employee based in Chicago who produces the credit union's TV and radio ads.
"There's good and bad associated with the government stimulus money, and anytime we can show the good work we're doing for people, not just here at Community First, but credit unions and government programs, well, that benefits everybody," Ogden said.
This year's Governmental Affairs Conference will be a busy one for Ogden and Community First. In addition to nabbing the CU Times Trailblazer Awards in lending and community service, the Gregory's video also won the National Credit Union Foundation's REAL Member Stories Video Conference and will be featured during the Monday night Herb Wegner Memorial Awards Dinner.