A Political Solution Should Not Set Mortgage Standards
Part of the fallout from the mortgage meltdown is the debate on what constitutes a qualified mortgage. [See "Regulators Discussing Definition of Qualified Mortgages, cutimes.com, March 3.]
The simplistic view is that all of our problems will be resolved if we just have 80% loan-to-value ratio loans. This is the best reason why government should not try to solve our problems. The solution is truly the responsibility of the people who have to live with the solution and who do not have a political agenda. I was happy to read that at least one congressman spoke out on the issue that 80% LTV is only part of the solution.
I learned how to mortgage underwrite when I was a federal examiner and credit unions got the authorization to make 30-year mortgages. I took the mortgage underwriting courses provided by the Mortgage Bankers Association. Then the traditional mortgage was one that was sold to the secondary market and it was investment grade. There were many issues that the underwriter had to prove in order to get the mortgage up to standard. This standard and those issues form the base for the program that I developed at Lafayette FCU to mitigate risk and provide a mortgage product to members that they could invest in.
Let me explain. In 1987, I was the CEO of Lafayette FCU. Because I had a field of membership that included Foreign Service officers serving overseas, the traditional conforming mortgage was not available to them. The board of directors charged me with the duty of developing a mortgage product that the members could invest in and help primarily the members who were serving the United States overseas. Yes, I used the word invest because we were going to hold these mortgages. It was member deposits that I was investing in member primary residences. The membership benefited from this program because the excess income that we made and improved penetration in the wallet share of the member led to higher performance of the institution.
I identified five areas of risk that needed to be determined to properly price the risk. There are other issues that a good mortgage underwriter would look at, but pricing is 99% of the game. These areas of risk were loan-to-value, debt ratio, credit score, amount and adjustment period. The more risky the request, the higher the interest rate offered to the member. The program was actually self-policing. The higher the risk the greater the chance of being priced out of the market. It forced members to get real with their requests.
I developed a base rate that was a function of the cost of funds of the membership plus an operating margin to cover our operating expenses. The member would have to have a loan request where they were lower than 80% LTV, less than 30% debt ratio, "A" level credit, less than $100,000 and a one-year adjustment period. Any mortgage issued above those basic guidelines caused an adjustment to the base rate. The cost of funds was the index and the operating margin and any other adjustments for risk became the margin that stayed constant as the cost of funds changed the price over time.
The product immediately became the focus of NCUA hostility. It did not fit their playbook of selling everything to the secondary market. I argued with examiners and the regional office for 16 years. We made money safely and soundly, and they ranted that it could not work. You must appreciate my cynical laugh with congressional attempts to define what is in front of them. The problem is that they are looking for a political solution when a practical solution is in order.
I love to lend money. I believe that a mortgage and a share draft account is a cornerstone to member development and success of a credit union. Only approving loans that are 80% LTV will have a devastating effect on the young and the lower income people that could benefit from ownership of a primary residence. Presently, the rent to own relationship is actually moving in the favor of the buyer. The absolute requirement for 20% keeps people out of the market.
Credit union leadership should consider the possibility and not blindly sign on to a solution drafted for the benefit of the bankers because we will lose.
Certified Financial Planner
Rehoboth Beach, Del.