MADISON, Wis. – Nationwide, mortgage lenders are bracing for what some experts have predicted will be a sharp increase in foreclosures as adjustable rate mortgages that were very popular during the last refinance boom, reset. Credit unions won't be immune to this trend, but if industry mortgage experts' assessments are correct, CUs will be less exposed to credit risk interestingly not so much because of what they have done, but for what they haven't done.
Already there are signs of what's in store for the mortgage market: On the West Coast in just the first quarter of 2006, foreclosure activity in California increased an annual 33.6% to 28,550 incidents, according to Sacramento, Calif.-based Foreclosures.com. In addition, notices of defaults, one of three foreclosure indicators tracked and the first step in the foreclosure process, increased 36.5%; and the number of real estate-owned properties, the final step in the foreclosure process and an indication that there's a new owner, increased 27%.
That trend is evident in other Western housing markets. In Nevada, for example, Foreclosures.com reports foreclosure activity more than doubled in the first quarter 2006 to 4,544 incidents compared to the final quarter 2005. The problem there, opines Foreclosures.com, is speculation-25% of new home sales went to out-of-state investors.
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Meanwhile, Colorado has seen a 50% increase in new foreclosures in the first three months of 2006 compared with the final three months of last year. That trend is being mirrored in other parts of the country. In Florida, for example, the Palm Beach Post reported that more than $106 million in home loans collapsed in Palm Beach, Martin and St. Lucie counties in the first quarter 2006, compared to a little more than $68 million in mortgages defaulted in the first quarter 2005. Despite these dismal numbers, CUNA economists say credit union chief financial officers and CEOs they've talked with have said they've not only not seen an increase in foreclosures, they're also not very concerned about them. "A lot of credit unions didn't make the real exotic types of mortgage loans like interest only, negative amortization or option mortgages, like other lenders did. So they're not as exposed to the rate increases," says CUNA Economist Steve Rick. He also noted that many credit unions worked up credit models at higher rates for members who applied for 5/1 or 3/1 adjustable rate mortgages to see if the member would be able to make the higher payments when the loan rate adjusted. "Credit unions didn't want to make loans to members if they couldn't make the payments," he said. "If a member is in financial distress, that translates back to the credit union being in distress." CU Realty President Deb Jones says the LLC's CUSOs are already seeing a slowdown in credit unions' purchase money volume, and she attributes that to members' cautiousness about the economy, and rising interest rates and home prices.
Jones said CU Realty has already begun to see a fall off in business from credit unions "we've generally been able to count on every month." But she adds that credit unions' experiences are no different than what other lenders are dealing with.
"Even when someone's financial situation isn't impacted, they feel the future. So they tend to be more cautious when making major decisions like buying a home," she says.
CU Realty is currently in 11 states plus the District of Columbia. It's also in the process of implementing services in four additional states, and contracts are pending in 12 others. "Consumers are trying to feel out the market," Jones continues. "The Fed hasn't given us a determination on whether it plans to increase rates again in the future, so that tends to make everything a little slower." Of course another factor affecting members' purchase market behavior is the longer time it's taking them to sell their own home first. According to the National Association of Realtors, the national median existing home price for all housing types was up 4.2% in April 2006 compared to April 2005. In addition, total housing inventory levels rose 5.8% at the end of April 2006.
CU Realty Manager Kristin Shell says she's seeing a lot of credit union pre-approvals staying as-is longer. If a member has an idea of the home they want, with certain features, and they can't find that home for an affordable price, then that impacts their decision, she said.
"It's a steady stream of one thing leading to another," she said, adding that all areas of the country are being affected. CUs Avoiding The ARM Effect
Although rates are on the rise, many prospective homebuyers still opt for adjustable-rate mortgages. Nationally, the Mortgage Bankers Association reported about 35% of all mortgage applications are for ARMs, the highest level in almost a decade and more than double what it was in 2004.
Just the opposite is happening with credit unions-members are refinancing their ARMs for fixed-rate products. CUNA data shows that for the first four months of 2006, fixed-rate mortgages increased 2.3% while ARMs declined 1.4%. In comparison, in 2005, fixed-rate loans increased 3.0%, and ARMs grew 4.4%. Even though they may wind up making higher monthly payments, Rick says members are opting to pay more to get consistency. "In a flat yield-curve environment like we're in now, the rate on a 3/1 ARM is not much different from a 30-year fixed-rate loan. Credit unions are seeing a significant slowdown in ARMs." The risk with ARMs of course is that while the typical mortgage paradigm has consumers moving an average every seven years, many homeowners who financed their home during the refi boom with ARMs may find their loans turning over and resetting sooner than they expected and consequently find it difficult to make their mortgage payments.
This doesn't bother CUNA Chief Economist Bill Hampel who opines that as far as credit unions are concerned, "the idea of impending doom is somewhat overstated. The fact is the sky's not going to fall, Chicken Little was wrong."
According to Hampel, the largest proportion of loans that have gone into foreclosure already are subprime and the exotic loans. "Credit unions have been doing everything they can to get members into mortgages, but they're not doing a lot of exotics," he says.
"The big scare story people are talking about concerns how over the last few years some lenders have gone to heroic extremes to get people into homes because of rising home prices. They've pushed the exotic loans and loans with short lock-in periods and substantial bump-ups in rates after a period of time and negative amortization. These are `cruising-for-a-bruising' kinds of deals," says the CUNA economist.
Hampel doesn't think the majority of mortgages credit unions have been making will have substantial rate increases because of the rate caps and structures of the loans. While some members will see increases in their monthly payments, he's confident it won't make for a big increase in the number of foreclosures credit unions see. CUs, he says, will come out of this in much better shape than other mortgage lenders. -
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