RALEIGH, N.C. — Sometimes members don't want to hear that taking out a loan they can't afford in the long run isn't in their best interests, but that's no reason to turn them away once they realize they've made a mistake and need help, said Maurice Smith, president of Local Government FCU here.
LGFCU has made Christmas a little merrier for more than 50 North Carolina families who will keep their homes because the CU made nearly $6 million in loans through two mortgage products, a five-year ARM and an All Savers Mortgage. "Some of these folks came to us originally and we said 'no' to them because we felt the loan they wanted wasn't in their best interests; maybe it was for too much money or for another reason, but we made that decision and they went to another provider," said Smith.
Over the summer, as Smith saw the mortgage market problems begin to escalate, he sought a way to reach out to those members, and other possible borrowers who might face foreclosure due to rates resetting past their affordability. The CU sent out letters to nearly 19,000 potential borrowers. "We've only seen the tip of the iceberg," he said. "But we couldn't just sit back and let it happen, so we came up with a couple of products that would offer a better solution for homeownership."
The $750-million-in-assets LGFCU with 158,000 members let members know that they could refinance into a more suitable mortgage. The five-year ARM is a 20-year mortgage offering 100% financing up to $400,000. LGFCU's rate is currently 6.75% and is subject to change every five years. Increases are limited to 1.5% for each increment with a maximum increase limit of 4.5% percent over the life of the loan.
The All Savers Mortgage is a fixed rate, with 100% financing, a 15-year term and a maximum loan amount of $400,000. A feature of the loan is that an additional 10% is financed to open a share term certificate (STC) with a rate equal to the mortgage loan. These funds in the savings vehicle are only made available under a few circumstances: it's been 10 years since the loan origination, the mortgage has been paid in full, or the mortgage balance is less than the STC balance. Currently the rate for this loan product is 6.50%.
Smith admitted that it wasn't always easy for members to accept no for an answer. "But we have a duty as credit union people to protect the interests of all our members. It reminds me of being told as a kid to take a tablespoon of Castor Oil. It's good for you but you sure don't want to take it."
And Smith said he takes no pleasure whatsoever in being right about saying no when people simply want what they want and haven't thought through the future consequences. "It isn't always appreciated and members are savvy enough to say, 'OK, I'll go somewhere else where I can get what I want.' The question still remains, however: Can you live with the terms?" Smith recognizes the fundamental conflict and possible flaw in credit unions being caught between wanting to make loans and keep members happy when it's not a good choice for either one. No one wants to play 'daddy' and take on the attitude that they know best. It's just that sometimes, often, in fact, that daddy does know best.
Smith also recognizes the greater societal and capitalistic drives involved. "When a member goes to a mortgage broker they may think, that like the credit union, that person is keeping their best interests at heart, that they can be trusted like the credit union. But that broker has no fiduciary duty to the borrower. The borrower is just a borrower, not a member. That broker is an agent of the company he serves and only has a duty to them," Smith said.
"Here at the credit union, we try to keep people sober about financial circumstances. And we were shaking our heads, asking, 'How did our members get into this mess?'" So, as an experiment, he and his wife started to go to open houses for expensive homes in the $1 million range and were shocked to have brokers advise them, "Even if you think you can't afford to buy this house, we can find a way to make it happen. We can make it affordable."
They offered a 40-year mortgage, an interest only term with a 1.9% teaser rate to lower the principal payment and conveniently left out taxes and insurance, leaving borrowers with no escrow, and no down payment. In the end, Smith said this million-dollar home would carry a payment of less than $900 a month. "Is it any wonder so many people say 'Sign me up?' It never ceases to amaze me the number of bad actors out there who will take advantage of people. And folks have got to start asking themselves, 'Who is my Master?' Will it be the broker, or are they willing to take a hard look and be willing to make the right choice for themselves, even if it means deferring all they might want."
Smith said that credit unions have an important part in all of this, and must be willing to stand up for that "promotion of thrift" inherent in the Federal Credit Union Act. Now more than ever, he said, CUs must be counted on to do the right thing for members. "No tax code, no law, can change that," he said.
–cburger@cutimes.com
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