Property values declined in most markets during the recession. And while some are stabilizing, others continue to struggle. In these uncertain times, credit unions are continuing with strong underwriting standards while helping members as much as possible to stay in their homes.
FHA loan demand
Michigan was particularly hard-hit by the recession, says William Lawton, president/CEO of $456 million asset Community Financial Members Federal Credit Union, Plymouth. But the state experienced economic challenges even before the recession.
Of the 20 regions tracked by the S&P/Case-Shiller Home Price Index, the Detroit area is the only market with real estate values still lower than they were in 2000, Lawton explains. “This is far worse than anything we ever planned for.”
On the other hand, “since Michigan didn’t see double-digit increases before the mortgage meltdown, there was a lot less speculation in our markets,” he says.
Residential property values have plummeted 47% in southeastern Michigan since December 2005. “In many communities, however, it seems property values have stabilized,” he notes.
But the credit union has seen an upswing in mortgage applications. “We’ve seen strong demand for Federal Housing Administration loans. While fewer members have qualified for refinances, we have fewer competitors, too,” he says, adding that “2009 was the best originating year we’ve had in a very long time.”
The credit union continued to lend even as values declined. It reduced credit lines on some home equity lines of credit, changed pricing on higher loan-to-value home equity loans, and is using a more conservative multiplier to establish home values.
The credit union also is selling most fixed-rate first mortgages it originates to minimize interest-rate risk. “We’re re-evaluating the level of fixed-rate first mortgages we can keep on our books and are modeling a 1,000-basis-points rate shock as a worst-case scenario,” Lawton explains. “I’m a firm believer that credit unions can, and should, hold a significant amount of fixed-rate mortgages on their books matched against nonrate-sensitive liabilities and equity.
“As with all things, balancing risk is key in dealing with today’s mortgage market,” he adds. “Know that your worst-case scenario really is the worst case.”
The credit union also has made significant changes in its collections processes, says Lawton. “Now we have one collector dedicated to mortgages, and an aggressive workout process driven by a cross-functional team to help keep members in their homes and reduce credit union losses.”
While housing prices in the Dayton, Ohio, area weren’t dramatically overinflated before the recession, property values have declined, says William Burke, president/CEO of $210 million asset Day Air Credit Union, Kettering, Ohio. “Many homeowners now owe more than their homes are worth. There are similar declines in the commercial property market.”
Day Air has responded by lowering its loan-to-value requirements and tightening other underwriting criteria. “But we’ve always used solid, conservative underwriting criteria,” says Burke, “so there hasn’t been as much of a shift as with many other lenders whose standards were too lenient in years past and who aren’t lending at all now.”
It’s difficult to forecast future mortgage trends, he says. “We recently sold a foreclosed property fairly quickly for $20,000 more than expected. But other than occasional anomalies, we aren’t seeing a turnaround in the decline of housing values. The rate of decline appears to be slowing, but we don’t expect an increase in those values anytime soon.”
Still, the credit union is doing a fairly brisk mortgage business. “It’s mostly due to refinances in this low-rate environment,” he says. “We’re handling many more refinance applications than purchase-money applications.”
Unfortunately, lower property values are preventing many homeowners from participating in what otherwise would be a refinance boom, says Burke, adding that foreclosures don’t appear to be slowing either. “We’ve only had a few foreclosures in the past, but now we’re dealing with almost a dozen. The result is we’re aggressively funding our allowance for loan loss reserve account.”
The credit union is working with members as much as possible to modify mortgage terms because, after all, it doesn’t want to take back their collateral, he says. “We’ve had great success with modifications, and will always work with members if they’re willing to work with us. But when there’s a job loss, death, or divorce, sometimes there’s nothing we can do to keep a member in the house.”
Nevada led the country in unemployment, at about 14.5%, at the end of June. Because the state, and especially Las Vegas, relies heavily on tourism, the recession hit hard.
“About 75% of homeowners in Nevada are upside down with their mortgages,” says Rick Schmidt, president/CEO of $142 million asset WestStar Credit Union, Las Vegas. “On average, homes in Nevada have lost about 55% of their value from the peak of the market. Right now, there are about 20,000 homes for sale in the Las Vegas market. Homes that sold for $200,000 five or six years ago now sell for as little as $60,000 to $70,000. The construction industry has suffered major job losses, too, as the market is overbuilt and has excess inventory for residential and commercial properties.”
On his way to work each day, Schmidt drives by several commercial properties that are nothing more than girder shells since construction has stopped. The area is both a buyer’s and a seller’s market, due to historically low prices. “It’s not unusual for a property to have 20 offers on it,” he says. “This is a purchase market for mortgages. We have fewer mortgage applications right now, but we aren’t aggressively pursuing it.”
Las Vegas home prices seem to have stabilized, he says, and in the past six to nine months the credit union has seen delinquencies and foreclosures decline. “Real estate delinquencies have dropped by about 20% since the beginning of the year, and foreclosures have dropped about a third—from about three to four a month in the recent past,” he says.
Schmidt is optimistic. “We’re now looking at 200%, 250%, or 300% loan-to-value numbers for some of our existing real estate loans,” he says. “But there’s a market for mortgages. People are seeing the combination of low prices and low interest rates as an opportunity to buy into this market. That gives me hope for the future.”
WestStar is making significant concessions. “It’s the right thing to do to help members stay in their homes,” says Schmidt. “We can’t turn our backs on our members when they need us the most.
“In the last year, we’ve done 26 workouts and modifications and only four are nonperforming,” he adds. “It’s the right thing to do—to provide members with the level of service they expect, and in the process, build long-term loyalty.”