While Fort Knox Federal Credit Union has offered 30-year fixedVeteran Administration loans to its members, the cooperative isseeing more success with an adjustable rate mortgage program.

About 33% of the credit union's 82,000 members serve in themilitary or have retired from military service, according toRaymond Springsteen, president/CEO of the $1.2 billion financialinstitution in Radcliff, Ky.

“That's really not surprising, given our very long associationwith the post,” he said. “Military personnel, both retired andactive duty, have been an ongoing part of our membership foryears.”

Fort Knox FCU offers standard, 30-year fixed rate VA loansthrough a relationship with another firm, but has found many of thecredit union's military members have been drawn to the creditunion's other mortgage products, particularly the 5/5 and 3/330-year mortgages, he noted.

The competition from the VA product could be significant becausemortgages made through the agency's program do not require a downpayment or private mortgage insurance, Springsteen said. Theirappraisals do not stop at the value of the properties but alsoinclude inspections into their safety, soundness and sanitation.Approved VA loan recipients will also receive assistance shouldthey fall into dire financial straits.

The downside of the VA loan includes a funding fee, which runsabout 2% and complicated eligibility requirements and limits. Forexample, on a $150,000 loan a 2% funding fee is $3,000, which theborrower can finance but still has to meet somehow.

Staff time and other resources required to track and underwriteVA loans were among the reasons Fort Knox FCU decided to outsourcethat business, Springsteen explained.

“We periodically take another look at it and review thedecision, but so far, we haven't headed in that direction,” hesaid.

In order to compete with the VA loan, Fort Knox FCU allowedborrowers to finance 100% of the home price in their adjustableloans without requiring mortgage insurance. The credit union willalso finance closing costs in the loan. By contrast, thecooperative will only finance up to 80% of the home's value throughits 30-year fixed rate product and expects to charge closingcosts.

Springsteen said the ARMs also have to overcome the stigma ofbeing an adjustable rate product.

“People have such negative ideas, many of them that they haven'treally thought through, about adjustable rates loans,” he said.“Our first task was to sit down with our loan officers and explainthe math to show them how these loans can leave members far betteroff financially after 10 years than would a fixed rate loan.”

The key, he suggested, is to look at ARMs across their lives andto evaluate them in that context. Data from the NCUA underlined howthat formula has helped grow loans.

According to Fort Knox FCU's NCUA December 2009 Call Report, ithad 41 ARMs on its books that totaled $3.51 million and 16originations that year. By the end of 2013, the credit union posted108 ARMs that totaled $15.1 million and 29 originations. Inaddition, as of June 2014, the financial institution posted 149loans valued at $20.7 million, with 44 originations so far thisyear. At the end of June, Fort Know FCU posted income of $8.67million with a delinquent loan ratio beneath its peer group and areturn on average assets of 1.52%.

Lending activity has been steady for the credit union that wascharted in 1950 by 10 civilian base employees with $1,000 in pooledcapital as Fort Knox Civilian Employees Federal Credit Union toserve fellow civilian workers. In 1960, it broadened its charter toinclude service personnel and dropped the words “civilianemployees.”

Son Nguyen, co-founder and president of the Veterans Associationof Real Estate Professionals,urged credit unions and other lendersto act completely in the best interest of their military borrowers.The association would want more information about credit unions'work with military borrowers, he added.

“If there are institutions out there putting veterans in qualityhome loans, I say great, more power to them, go for it,” Nguyensaid. “But what we have often found is that institutions will putveterans in loans that are good for the institutions and not asgood for the veteran.”

VAREP encouraged lenders offering VA and other loans to puttheir respective qualities on paper in front of borrowers, so theycan easily compare them and make informed choices. Nguyen cautionedagainst assuming or believing that a given alternate product willnecessarily be better for veterans because each individual person'ssituation can be very different. He said while many veterans mightbe motivated to try the Fort Knox FCU ARM to avoid the VA's fundingfee, a veteran with a 10% war-related disability might be exemptfrom the fee.

“Really, a military service member needs to speak with peoplewho genuinely know their options to help them evaluate theirchoices,” Nguyen said.

He stressed that he was not accusing Fort Knox FCU of notserving its military members well, but added that he always paysextra attention when a lender claims to know what is best forveterans or military personnel as a group.

Katie Miller, vice-president of mortgage products at the $60billion Navy Federal Credit Union in Vienna, Va., said she couldimagine several scenarios that would make ARMs attractive tomilitary borrowers. As of June 2014, the credit union bookedroughly 14,000 mortgage loans, approximately half of which were VAloans, according to NCUA data and Miller. Navy Federal also offersa 100% financed, no PMI alternative loan to the VA loan.

Miller agreed that while individual borrower circumstancesdetermine which loan works best for a military borrower, thosescenarios could either favor or disfavor an ARM similar to the oneoffered by Fort Knox FCU. For example, since a borrower can haveonly one VA loan at a time and subsequent VA loans can be moreexpensive to originate than the first, Miller said she couldimagine why a military borrower might choose an ARM.

“They might opt to not use the benefit at its least expensiveuntil they are someplace where they could see themselves settlingdown,” Miller observed.

Likewise, ARM loans with a very low initial rate could beperfect for active duty military borrowers who knew they werelikely to be posted somewhere else within five years, sheexplained.

“In that situation, an ARM with a low first rate might save theborrower a lot of money over a fixed rate loan,” Miller said.