Credit unions may find themselves increasingly playing the role of landlord, according to a recent Federal Reserve policy statement and a property management firm that serves credit unions.
The Fed released a policy statement April 5 clarifying its position on the rental of residential real estate owned properties. The Fed doesn’t have authority over credit unions on the matter, but credit unions may be interested to know the paper ominously stated that “with mortgage delinquency rates remaining stubbornly high, the continued inflow of new real estate owned properties–expected to be millions more over the coming years–will continue to weigh on house prices for some time.”
Brent Taggart, senior vice president of client relations for the West Valley, Utah-based Green River Capital, said he thinks his credit union business will grow. The asset management firm currently has four credit union clients through a partnership with the $2.9 billion Mountain America Credit Union. Taggart said that while some housing markets in Arizona, Florida and California have rebounded, others have yet to hit rock bottom.
“If a credit union can hold the assets on its books and collect income from renters, it could be a good strategy in certain markets,” he said.
Taggart added that the Obama administration’s efforts to rent out foreclosed properties owned by the Federal Housing Administration, Fannie Mae and Freddie Mac, including a $320 million Fannie-owned block of mortgages that investors will be required to rent out, will further encourage the trend.
Keeping members in their homes even if they can’t pay the mortgage is consistent with how credit unions serve members differently than banks, and how the nonprofits make decisions that benefit their communities, he said.
Karen Church, president/CEO of the $299 million ELGA Credit Union in Burton, Mich., is a reluctant landlord, and said she hopes to decrease her Flint-area institution’s $3 million REO portfolio to $1 million by year end. The credit union currently rents five of its 30 foreclosed properties, primarily to tenants who were already living in the investment properties.
ELGA manages the properties in-house, utilizing a full-time asset manager who oversees all residential assets on the books. Church said rental income covers the costs of owning the real estate, and renters deter vandals. However, due to NCUA regulations, rental income cannot be used to reduce the amount owed on the failed mortgage.
The NCUA “doesn’t want credit unions to be in the rental business,” she said. The federal regulator would prefer credit unions to “fire sale the properties, take your losses and be done with it,” she said. However, given the weak housing market in Flint and the lack of reasonable offers, the NCUA has been flexible with ELGA.
“The sale of properties definitely creates a loss for us, and we have been taking losses to remove them as quickly as we can,” she said. “We would gladly take our lumps if someone would just offer us a reasonable amount of money for them.”
In a letter to credit unions in December of 2008 on the subject of foreclosed and repossessed assets, Michael Fryzel, who was NCUA’s chairman at the time, wrote that such assets “should only be held temporarily and not permanently as an income-producing asset.” Fryzel warned credit unions that if they consider leasing a property they can’t sell, they must still actively market the foreclosed property for sale even if a tenant is living there.
The $54 million Electric Service Credit Union in Nashville, Tenn. currently rents one of the residential properties on its books. President/CEO Ron Smith said other foreclosures taken over by the credit union were too damaged to rent, but the rental property was in good shape. Rather than take a $50,000 loss liquidating the home, the credit union hired a property manager to rent it instead.
“We have done this for two years and have been very fortunate to have the same renter during that entire time,” he said. In fact, the renter recently asked to purchase the home.
“We told them if they keep up their end of the deal, paying rent on time and meeting our minimum qualifications, we’d give them a good deal,” he said.
Smith said he hasn’t encountered any difficulties from regulators “because it’s only one house, and we’re avoiding a loss.”
California Credit Union league Director of Research and Information Rita Fillingane said she’s unaware of any credit unions in California or Nevada that maintain active rental portfolios, but said her department has fielded a few questions over the past few years about renting REOs.
Most credit unions don’t have the expertise to deal with rentals, she said, so they are probably more interested in liquidating real estate. Overall, real estate market conditions are improving in California, she said, but there are still pockets where markets are struggling.