WASHINGTON – The headlines sound an alarm – "More homeowners face foreclosure"; "Foreclosures soar nationwide." Should credit unions worry? Maybe, maybe not. It depends on who you talk to, where your credit union is located, and whether you're assessing today's situation or what may lie ahead. The data that has drawn so much attention comes from the Mortgage Bankers Association. Doug Duncan, the MBA's chief economist, explains the group tracks two categories, the percentage of loans somewhere in the foreclosure process and the percentage of outstanding loans that entered foreclosure in the current quarter. A report released in September by the MBA shows 0.4% of loans entered foreclosure in the second quarter this year and another 1.23% were still in the process. Those are the highest figures in 30 years. Duncan notes in some states foreclosure only takes 90 days, while in other states it can drag on for two years. So the figures can be affected by which states are being hit hardest. He sees two things behind the rise in foreclosures. "The biggest factor is always the economy. The overall economy lost 1.8 million jobs in the recent recession and we haven't added many back. So that certainly has an effect on both delinquency rates and foreclosure rates. "Certainly there is the argument that different kinds of mortgage products, some of them being tested for the first time in a recessionary environment, may be contributing. I think there has also been a flow of mortgages to people who have not performed well on other forms of credit – the higher risk borrowers in the subprime market," Duncan says. The Federal Housing Administration has faced some challenges, he indicates. In the past high low-to-value mortgages were FHA's bread and butter. Now there are private options that have pulled better-qualified borrowers out of the FHA portfolio. In addition, in areas where property values have increased, when interest rates dropped borrowers could move out of FHA insurance to a conventional mortgage, pulling still another group of good borrowers out of FHA. At the same time, automated underwriting tools have put into the private sector borrowers who would previously have been directed to FHA. The people who moved out of FHA benefited from better rates. But FHA's portfolio, on average, has carried a higher risk and not performed as well. "We certainly see that in foreclosures," Duncan declares. He says the Midwest, facing losses in the manufacturing sector, has seen the greatest problems. The collapse of the dot.coms has also affected areas such as Boston. In Western states like California, sharp increases in property values have allowed homebuyers squeezed by mortgage payments to sell and move into less expensive houses. The ABA data does not break out information by lending sectors such as credit unions. But Duncan does have some advice for credit unions, especially those retaining mortgages in their portfolios: * Look at the direction of job growth in your market, and how that has affected housing there. * Practice early intervention. Tell borrowers to contact you at the first signs of trouble so you can provide solutions. Depending on the size of the portfolio, there are statistical tools that can identify loans likely to become delinquent. Those tools are expensive, he cautions, and may not be cost-effective for smaller credit unions. * Understand how various mortgage products you offer are actually performing. Consider changing your underwriting criteria on those that are struggling. While the ABA data has sparked concern, DataQuick says it really hasn't seen a major problem, even though defaults are up in certain areas. "There are some markets where default activity is on the rise," says John Karevall, a DataQuick analyst. "The MBA polls its members and looks at defaults. Recording a default notice can be a way for lenders to crack the whip to get people to pay faster. "Our data monitors recorded notices of default, the first step in the foreclosure process. We also monitor trustee deeds recorded, which is the last step in the foreclosure process. On a nationwide basis, we're not seeing those numbers go up." However, Karevall does expect to see the numbers rise. One reason is home appreciation levels are tapering off from about 7% annually to 6%. "There is a very close tie between appreciation rates and foreclosure and default rates," Karevall says. "The faster homes go up in value, the lower the default and foreclosure rates." As for the impact from the expanded pool of loan products, "There are those who think lenders have been lax, lowered their standards and made riskier loans. On the other hand, lenders now have access to much more accurate and detailed risk management information. They are able to adjust their underwriting criteria to a degree they haven't before. That has opened the home mortgage market to categories of buyers who were previously excluded. I think that's good." His advice to credit unions – the more homework you do, the better off you are. You have to go beyond being persnickety about the buyer's background. Consider the economic macrofactors in your local market. Bob Dorsa, executive director of the American Credit Union Mortgage Association, says he hasn't received any indication foreclosures are a problem. Even if the nation's foreclosure rates are higher, he suggests that would have a very minor impact on credit unions, who have less than 5 percent of mortgage assets. "Just from my personal experience working with credit unions and CUSOs in real estate lending, it has been pretty much determined that the asset quality of credit unions and their members is a good bit above the national average," Dorsa says. "Credit unions for the most part aren't dealing as much with purchase money loans. Most real estate loans in the credit union community are refinance loans or equity-type loans. Secondly, credit unions generally don't work with mortgage brokers who would in essence be out dealing with people unknown to the lender. Credit unions focus on their members, and in most cases those people have some sort of financial history with the credit union," Dorsa added. However, he continues, that doesn't mean credit unions can just sit back and not worry about mortgage delinquencies or foreclosures. As credit unions and CUSOs get increasingly progressive and aggressive in real estate lending, they will probably encounter more cases where homebuyers face problems. "But in the long run, real estate lending by credit unions almost has to get more aggressive," Dorsa says. "A lot of the money that has left the equity market has found its way into credit unions. I believe CUNA reported deposit growth thus far this year is over 20%. Loan growth has not kept pace. "When you have auto manufacturers promoting a steady diet of zero percent financing, and credit unions with funds coming in and more competition for auto loans and other consumer loans, it would seem logical to look for more diversified lending – which would be real estate." -


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