A credit union in Memphis, Tenn., has struck upon an approach to its foreclosed properties that could provide an example for both credit unions and banks on how to address the large stock of real estate they have come to own.
The "Home Run" program will allow financially stable members who have poor credit histories, an inability to obtain mortgage financing and lack a down payment to purchase the real estate owned by the CU. According to the credit union's September Call Report, MATCU has foreclosed and repossessed 34 real estate loans worth $1.8 million.
Members in the program will rent one of the MATCU-owned homes for two years, make regular monthly payments and attend a financial education course offered by the RISE Foundation, a Memphis area housing organization. At the end of the two-year period, the CU will sell the property to the renters for less than its tax assessed value and apply the members' two years of rent as down payment.
"The goal for this program is to get good people, who may have had some financial troubles in the past, into a nice and affordable home," said Daniel Weickenand, CEO of MATCU. "This will stabilize communities by putting ownership back into the hands of our neighbors."
"We believe that education plus incentives equals success," said Linda Williams, CEO of RISE. "Our financial literacy programs already provide the education; this program will provide the incentive that leads to a successfully rebuilt Memphis housing market."
MATCU wound up foreclosing on the properties after it refinanced mortgages from other institutions without sufficiently underwriting the refinances, according to Weickenand, who took on the CEO job in August.
Weickenand declined to criticize the CU's former leadership in detail, saying that he has a policy of not criticizing the CU's former leaders, but he noted that the previous administration had left the credit union with a significant REO burden that it had not had previously.
Weickenand acknowledged that he had moved fairly quickly on the REO issue but said that he had never been known for "letting the grass grow under my feet."
The Home Run idea arose because the CEO was bothered by the way MATCU had been dealing with the REO properties when he came on board.
Essentially, the credit union had been selling them at between 20% and 40% of the properties' tax assessed value to outside investors, Weickenand explained. The investors would then repair what needed repairing and rent them out in expectation of reselling them when the market improved, a practice known as real estate flipping.
"I am not against anybody making a buck, Lord knows," Weikenand said, "but I had to ask if we were handling these properties as well as we could both for the credit union and our members."
Under the Home Run program, MATCU will sell members the REO properties for roughly 70% of their tax assessed value, between 30% and 50% more than it is currently getting, and the program helps the CU manage the properties in the meantime. Unlike usual landlord-tenant arrangements where the property owner is responsible for most property care, the CU will only be responsible for major repairs.
"The tenants will be responsible for all repairs up to $1,000," Weickenand said, as well as all routine maintenance, like mowing the lawns and other upkeep. MATCU will also bear the responsibility for the homes insurance and tax payments, he added.
In addition, participation in the program will require members to finance the home's purchase with the MATCU, giving the CU interest income on the back end as well, he added. Someone from the CU or perhaps from a property management firm will visit the properties from time to time to check that they are being maintained adequately.
Weickenand said the goal is to help MATCU members who have likely experienced financial reversals or problems because of the recession to be able to afford a home-not just a marginal home either, but a nice home in either a new subdivision or even one of the Memphis area's more established neighborhoods. Having the requirement of basic maintenance in addition to rent is meant to help the members arrive at homeownership with experience of the requirements that owning a home carries with it.
In addition to graduating from the RISE program, the members will are required to have a stable job for at least two years if they have lived in Memphis or for at least a year if they moved to the Memphis area in order to take a job, Weickenand said. Further, members who want to participate in the program will have to have direct deposit with the credit union and not have any delinquent or defaulted loans.
MATCU had a previous relationship with the RISE program through another program, in 2008 to help immigrants and people with bad check histories to better their financial condition and open checking accounts at the CU. In order to qualify for a year of free checking at MATCU, the members had to attend and graduate from a RISE financial education program.
The history that MATCU and RISE share has meant that MATCU already has members who have graduated from its financial education program and who could be eligible for the Home Run program quickly. This has led MATCU to determine program participation on a first-come, first-serve basis among eligible members.