Contrary to conventional wisdom, as the nation moves through an extended housing downturn, a number of credit unions have found themselves faced with significant amounts of REO.
REO represents real property the credit union has taken over after members lost the ability to pay make their mortgage payments or, in a smaller number of cases, walked away from their mortgage notes.
Historically, credit unions have generally not held much foreclosed real estate, industry experts say, because their mortgage underwriting has usually been more conservative than that of the mortgage banking industry at large and because they have often been more willing to renegotiate or refinance the terms of loans on their books.
But the depths of the economic downturn, the drop in real estate prices and the numbers of members who have found themselves in trouble on home equity loans has meant that the numbers of credit unions that find themselves having to manage and try to sell real estate expanded sharply.
For example, so rare were credit union foreclosures before the downturn began that some credit unions reported never having made a foreclosure prior to housing crash and were thus caught unprepared when they began to have to make some.
Some credit unions, for example, had no mortgage loan-loss mitigation procedures in place because, simply, they had never had a foreclosure before 2007, they said.
But now credit unions across the country indicate that they have been forced to become real estate managers, marketers, and in some cases, landlords as they have tried to keep up with the swelling amounts of real property on their assets sheets and they have chosen a number of different approaches to the problem.
The $2.9 billion, 354,000-member Mountain America Federal Credit Union took the approach of turning to an outside firm, Green River Capital, for help in managing and eventually liquidating its REO portfolio. The South Jordan, Utah, based credit union had 67 properties worth rough $12.5 million on its books as of the end of March of this year.
The credit union turned to Green River Capital for the degree of its expertise in managing REO for financial institutions as well as the relative ease of use the firm had for management, according to the credit union. Mountain America grew impressed enough both with the scope of both its own REO portfolio and the REO being reported by other credit unions that it decided to begin offering Green River's services to other credit unions through its wholly owned CUSO, Mountain America Financial Services.
Rather than turn to an outside firm, the $23 billion, 1.7 million member State Employees' Credit Union in Raleigh, North Carolina decided to re-organize its REO operation after the amounts of real estate it held began to rise. According to its reports to NCUA, the credit union had 319 properties on its books worth roughly $33.5 million as of the end of March.
Generally SECU has received widespread praise for its efforts to keep members struggling with their payments in their homes, often in face of wide spread budget cuts and layoffs. But Marc Coburn, senior vice president for loan servicing, explained that SECU also figured out that, despite its best efforts, not all member home owners were going to be able to remain in their homes and that the CU had to be ready for that eventuality.
“When we launched the second phase of the mortgage assistance program, we also re-organized our efforts around REO,” Coburn said, explaining that SECU diversified much of the responsibility for evaluating and managing the credit union's REO onto the branch staff and adopted an overall goal of holding on to each foreclosed property for as little time as possible while, at the same time, getting the best possible price for the property's re-sale.
Coburn said SECU has a policy that said that makes sure the property is evaluated on a number of different factors within 30 days after the credit union assumes control of it. In addition, the branch officer designated to address REO in his or her area is empowered to handle most of the issues a property might present, everything from making small cosmetic repairs to the property, arranging for utility cut off or resumption and arranging with others in the department to make sure taxes and insurance are paid.
Most importantly, Coburn said, within 30 days that designated officer should have met with a Realtor and arranged to have that property listed, if possible, at a fair price that represents both its appraised price as well as any adjustments.
“This is where it can get tricky,” Coburn said, “balancing the appraisal, with the Realtor's opinion and what the branch officer knows about the area. Sometimes we decide to ask the appraisal price plus a 10% or 15% premium, sometimes we ask the appraisal price alone and sometimes we have to keep it off the market to make some significant changes or repairs to it,” he explained.
If a property has not moved in 60 days, he said, if there have not been any showings of it or if there have not been any offers, the CU evaluates it again and, if it decides the price has been too high, cuts it and re-lists it or, in some cases, changes the Realtor its using.
The CU's innovation, he explained, was to get more of the credit union staff involved in REO management and liquidation but in an organized way across the credit union, so that at any given time, the CU can know that all of its REO is moving steadily toward some sort of resolution.
For the $361 million, 27,000 member BMI FCU, headquartered in Dublin, Ohio, the real estate on its books has meant taking on a role it never expected, that of a landlord. According to its reports to NCUA, the credit union had 83 properties worth $3.4 million on its books as of the end of March and CEO Sharon Custer reported a large number of those properties had tenants in them when the CU foreclosed on them.
Custer said the loans were residential loans but that over time the original borrowers had moved on to other properties and chose to rent out their former residences, leaving them with tenants when BMI took them over. She said the CU had decided not to evict the tenants, in part because the CU believed both properties and neighborhoods were better cared for with people in living in the homes, even if that meant they sometimes could take longer to sell.
“We just believe it’s better for houses to be occupied,” Custer said and challenged the idea that just because a property has tenants, it will necessarily be a harder sell. “We have had investors buy the properties so they are selling,” Custer said, adding that investors have often found the properties more appealing because they had a history as rental units with tenants.
But she also added that the numbers of REO properties on the CUs books had not dropped overall because BMI was l still taking them on as fast or slightly faster than they were being sold. “We aren't seeing a real improvement in the situation yet,” she said.