All credit unions that originate mortgages should have at least a procedure in place for what do when some or most of those mortgage borrowers get into trouble with their loans.
That is the message from two mortgage executives whose credit union is situated in the heart of one of the states hardest hit by the housing crisis.
"Before 2007, we had never had a foreclosure, or even a meaningful mortgage delinquency," said John Bretthauer, chief lending officer for the $1 billion California Credit Union. "We didn't have a loan-loss mitigation program because we really didn't need one," he added. "It had never come up."
Needless to say, the need for a loan-loss program has become evident since 2007, and Bretthauer has joined George Shipman, a recently retired California Credit Union employee and longtime mortgage officer, in urging all credit union mortgage lenders to put a loan-loss program into place as part of their mortgage program.
"Everyone wants to be in on the first part of the story, where we originate loans that help happy homebuyers get the homes they want," Shipman told CU mortgage executives attending a breakout session of the American Credit Union Mortgage Association's annual conference. "But this session is about what happens on the other side, when those loans sometimes run into trouble or even go bad. That's part of the mortgage lending story, too."
Bretthauer and Shipman recounted that the economic and housing crisis that would eventually overtake more than 160 of California CU's loans came upon the credit union relatively suddenly. Headquartered in Glendale, Calif., the credit union had long been very conservative in the mortgage products it offered and in how they underwrote them.
"'We hadn't done any of the sorts of mortgages that you would expect might cause problems later," Bretthauer explained. "We hadn't done subprime, and we hadn't done balloons. We did only very few ARMs, and our underwriting was very solid."
But Bretthauer explained that the economic downturn took hold in the Los Angeles metropolitan area quickly and soon left many members unemployed with sharply diminished economic prospects.
"People who qualified for a mortgage prior to the downturn wouldn't qualify now," Bretthauer noted.
Because California CU had never had a foreclosure before 2007, when the number of loan delinquencies began to grow rapidly, the credit union was caught unprepared, both Bretthauer and Shipman agreed.
The task of drafting a response to the growing problem fell to Shipman, then a lending executive with the CU, largely because he had experience with foreclosures and loan mitigation that predated his arrival at California. Although Shipman had been involved with credit union mortgage lending for 17 years, he had worked in mortgage lending since 1971.
Shipman and Bretthauer said the approach California CU found to establishing a loan-loss mitigation program was very complicated, but some principles become evident.
First, depending on what the foreclosure laws are in their areas, credit unions setting up loan-loss mitigation procedures should put starting the foreclosure process earlier in the procedure rather than later, Bretthauer and Shipman agreed. The CU would not necessarily need to follow through with the foreclosure, particularly if that were not in the best interest of the member and if another option were available, but starting the process early gives the credit union leverage and the extra time might be needed if the foreclosure process is very long, as it often is in California.
"Sometimes for some of our members, the notice of default comes as a wake-up call," Bretthauer said. "Maybe they have been avoiding our phone calls, keeping their head under the pillow, hoping it would just go away. The notice of default wakes them up that we are serious, and they need to call us to deal with the problem."
Second, when evaluating a loan in arrears, credit unions should treat it like a new loan application, the executives said. Document as much as possible, reappraise the property if possible and get as much information as you can about the state of the borrower and loan. That will help you determine which course is going to be best for the member, they said.
"Sometimes, in some situations, foreclosure is the best option for everybody, but in other situations, like a temporary job loss, a forbearance might be all that is needed to get them back on track," Bretthauer said.
Shipman seconded his observations, noting that a significant percentage of the loan modifications and mortgage workouts that had come through the first wave of mortgage problems wound up defaulting again largely because the lenders had not sufficiently underwritten the loan workouts and modifications.
Finally, both men said it was very important for credit unions to have a plan for how they will address loans in arrears and the challenges they present. "It's important to have an idea of what will happen at different places in the process and what criteria you will use when deciding which direction an institution will take," Shipman said.