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Story Retrieval Date: 10/25/2014 1:17:47 AM CST

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Credit unions steer clear of the mortgage debt crunch

by Alexis K. Weed
March 12, 2008

With real estate foreclosures soaring  and packaged mortgage securities threatening global markets, credit unions are faring much better than their for- profit counterparts in the current crisis.

 “The originate-to-sell model is deeply implicated in the mess,” said Mike Schenk, a senior economist for the Credit Union National Association (CUNA), but for credit unions “asset quality remains high.” Schenk said lenders like credit unions that kept large chunks of their mortgage debt are more insulated from the problem.

 “We are a hair under one percent delinquent on our entire loan product [for 2007],” Schenk said. The charge-off rate, he said, currently stands at 0.52 percent. That compares to the FDIC delinquency rate--specific to commercial lenders--of 1.39 percent and a charge-off rate of 0.59 for the same year.

 While the figures do not single out mortgage loan delinquencies, they can serve as an indicator of a lender’s portfolio health. Schenk points out that the comparison should be considered somewhat of an apples-to-oranges one because commercial institutions, which fall under the FDIC’s purview, report delinquencies on a 90-day basis.

Credit unions, on the other hand, report delinquencies on a 60-day basis. As a result, the FDIC percentages may be viewed as further aggravated given that commercial institutions have approximately 30 additional days to collect debts.

Mike Murphy, lending manager and chief operating officer for Schaumburg-based Motorola Employees Credit Union, said any influence on credit unions has been negligible. “We have seen virtually no defaults on our mortgages. On a portfolio that is about $250 million we have maybe seen four or five loans where people have had difficulty.”

While credit unions were not immune from the recent influx of new mortgage products, part of their success can be attributed to tighter underwriting standards than those practiced through many mortgage companies.

“The real issue was the underwriting, not the variety of loan products,” Schenk said. Traditional mortgage debt to income ratios of approximately 28 percent--which ensure that lenders can sell their mortgage products on the secondary market--were raised to as much as 40 percent, Schenk said. “Some lenders pushed limits as far as 65 percent.”

“[The credit unions] may have had adjustable rate mortgages,” said Murphy, “but they are not the type of ARMs that people run into problems with.”

 Schenk said loosened loan to value ratios added to the underwriting problems. “Underwriters began to accept 100 percent loan to value ratios, rather than the traditional 80 percent.” Schenk said although credit unions followed suit by increasing loan to value ratios, they were not as aggressive as mortgage brokers. “I don’t think they did it in a big way,” he said.

Notwithstanding their greater insulation from the mortgage debt meltdown, Schenk said non-profit lenders are noticing reverberations. “We are seeing spill-over affects,” he said. Customers that have obtained loans from high risk lenders, he explained, are seeking refinancing options from lenders like credit unions that are less risk-averse.

Murphy echoed that outlook. “The result on credit union balance sheets are the rolling affects being seen in the economy,” he said. “As people start to loose jobs and the economy slows, they may have difficulty making their other payments.”

“At the moment we keep about 90 percent of the loans we make,” Murphy said. For now, credit unions might have to settle for holding a larger percentage of mortgage debt on their books. The previously sought after securities--free from commingled sub par products--are being passed over by conventional investors.

 “People who typically invest in this stuff don’t want anything to do with it, particularly hedge funds,” Schenk said.

 Ferenc Sanderson, a senior research analyst for Lipper (a Reuters company) said an estimated 30 to 32 percent of hedge funds engage in purchasing mortgage securities.

“The squeeze is coming from the banks who are giving loans to hedge funds,” Sanderson said. “They are more sensitive now than they were on collateral a year ago. They start to execute margin calls to clients like hedge funds.” 

Sanderson said the volatility in prices for so-called high quality paper is keeping investors at bay. “The fear is that it’s created these massive, wild price swings [for AAA paper].”

“There is heightened sensitivity,” he said.

“This is not about logic,” Schenk said, “it’s a crisis in confidence.”

Schenk urges mortgage borrowers to evaluate  current loans and to shop for more favorable alternatives.

“Neighborhood banks and credit unions are by and large ready, willing and able to lend,” he said. “Those looking to get out of toxic mortgages can find loans.”