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HOWELL, Mich. – The mortgage rate environment over the past year has been ripe with opportunities for credit unions to extend mortgage services to members buying a previously built home. But what about members who want loans to build their house? Five credit unions in Michigan through their jointly-owned CUSO, are finding a way to capture this market by offering construction-to-permanent mortgages. Huron River Area CU, Ann Arbor; Lansing Community CU; Ukrainian Future CU, Warren; KALSEE CU, Kalamazoo; and Lapeer County Community CU are co-owners of Multiple Services CUSO Inc. The CUSO was formed expressly to offer construction-to-permanent loans to members. Over the last four years, the CUSO has worked closely with The Construction Loan Company, dba Member Home Lending Services in Howell, Mich. for this service Although statistics point to a demand for new home construction lending and a growing new home construction market – according to the U.S. Census Bureau, single family home starts ranged from 1.1 million to 1.2 million over the last four years; in 2001, the new home construction market was $51.5 billion, and projections indicate continued growth of the market in the coming years – credit unions have been leary about getting into construction-to-permanent lending because of the risks they say this type of lending involves. But Gerry Gillikin, president, Huron River Area CU and president of Multiple Services CUSO Inc. says these are only “perceived risks.” By working with a turnkey operation such as CLC, which can originate the loan if the CU wants it to, conduct the feasibility review, order inspections, review the sworn statement and lien waivers, approve draw disbursements, and approve the builder or contractor, Gillikin says the risk shifts to CLC. “Construction-to-permanent loans are a very specialized area. For any credit union to do them on its own would require it to hire out or bring in expertise. Most credit unions have minimal or no knowledge of building construction or dealing with contractors. Offering construction-to-permanent loans through Multiple Services CUSO and working with CLC makes it possible for us to take funds from everyday overnight accounts and short term investments, and invest the funds in the CUSO, loan the money to CLC, and earn higher rates,” said Gillikin. In addition, he said, the CUs’ members are looking at their credit union as a source for all mortgage products and innovative services. CLC is currently doing construction-to-permanent lending for about 30 credit unions and is licensed to do business in four states – Michigan, Colorado, Florida, and North Carolina. The company is a division of Member Home Lending Services Inc., a full-service Fannie Mae approved homestyle construction-to-perm and homestyle renovation lender and loan servicer. In addition to providing construction-to-permanent loans, Member Home Lending Services Inc. also offers a full product line of financing programs for home purchase and refinance mortgages, renovation or home improvement loans, vacant land, bridge loans and loan servicing programs for credit unions. Construction-to-permanent loans have two phases: during the construction phase, the builder or contractor completes each segment of the work and loan disbursements are made accordingly. When the home is completed by an agreed date, typically six, nine or 12 months, the second phase – the permanent phase – begins. This is a “single closed loan” transaction using a set of documents that govern both loan phases. CLC President David Vittraino said credit unions typically earn 2-3% above prime during the construction phase. Vittraino said he’s not surprised credit unions perceive construction-to-permanent loans as being risky because of frequent cost overruns and the necessity of working with contractors during the construction phase. “With us though it’s not an issue because of what we request before we close on a loan to make sure it’s feasible,” he said. Among the documentation CLC requires to examine are contractor bids and building contracts. In addition, the construction loan doesn’t convert to a permanent loan until CLC does a final inspection, has a certificate of occupancy and receives a final endorsement on the policy. Moreover, Vittraino pointed out that members who apply for construction-to-permament loans are “grade A-type members” who have good credit and assets. “You don’t get a lot of people looking to build homes who can’t afford them. These are people who can afford to make a substantial down payment.” Sure there are cost overruns and some loans get highly involved. “We deal with that everyday,” said Vittraino, and they usually happen because people decide to go with things like better cabinets or a bigger home, he said. When cost overruns occur, CLC readjusts the loan terms. “It’s part of our business,” he said. The typical size construction-to-permanent loan CLC handles is about $150,000, but Vittraino said CLC has done loans as high as $1 million. About 40% of the loans the company does are for owner/contractor construction; 60% are for licensed building construction. All loans are underwritten to Fannie Mae guidelines. CLC gives a member’s credit union the first right of refusal on all loans. If the CU doesn’t want to take the loan, then the loan is funded by other investors. CLC sells all construction-to-permanent loans on the secondary market to Fannie Mae. A softer economy doesn’t necessarily softened members’ demands for construction-to-permanent loans, said Gillikan. People building large homes seem to be recession resistant, he said. Even though members with middle and moderate incomes are more susceptible to economic downturns, “you still have a group of members who want to do building projects during slow economic times because labor is cheaper and contractors may be more negotiable on prices,” he said, so these loans can be a nice balance to credit unions’ mortgage loan portfolios. -

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