Loan Modifications Part II: The 'Most Important Thing CUs Will Do' This Year and Next

September 25, 2009
Bill Vogeney: "Take as many factors into consideration as you can" when doing loan modifications.

Loan modifications are an unfortunate reality of the Great Recession: The percentage of modified first mortgages grew from 0.53% at year-end 2008 to 0.92% as of March 2009, according to CUNA’s economics and statistics department.

The same holds true during this timeframe for modified second mortgages (0.33% to 0.38%) and modified real estate loans reported as business loans (0.74% to 1.4%), CUNA reports.

But when is a loan modification a troubled debt restructuring (TDR)? It depends.

As well-intentioned credit unions try to help members, they face an intimidating balancing act of accounting and regulatory complexities.

Bill Vogeney, senior vice president and chief lending officer for $2.6 billion asset Ent Federal Credit Union, Colorado Springs, Colo., details his approach to loan modifications and TDRs.

CU Mag: What percentage of your loan modifications are TDRs?

Vogeney: There has been a lot of talk in the industry about how to define TDR. Our take on these loans, and that of our certified public accountant, is that modified loans of a temporary nature probably aren’t considered to be TDRs and aren’t required to be tracked as such.

If there’s a significant impairment, it would be considered to be troubled debt. But because these modifications are of a short-term nature—for example, a 15-year home equity loan that’s modified for one year—it’s not a significant impact.

We’ve also tracked the number of loan modifications we’ve done compared to our total portfolio, and it’s about 0.6%. That includes our Member Solutions initiative and our commitment to CU Harp (the Credit Union Homeowners Affordability Relief Program].

We’re being fairly aggressive with modifications. But people are paying and they appreciate the assistance. The large majority of these loans, once they get past the modification period, resume their normal payments.

CU Mag: How receptive have examiners been to your loan modifications?

Vogeney: The National Credit Union Administration looked at our program last February. I thought we’d get more questions about it, but they probably had bigger fish to fry.

Our financials are solid, our delinquencies are low compared to our peers, and charge-offs aren’t escalating. We didn’t get many questions about our Member Solutions Program.

Next: The future of loan modifications

CU Mag: What do you see for the future of loan modifications at your CU?

Vogeney: We’ll still need to approve some new modifications going forward because the job losses haven’t stopped, and we’ll continue to have increasing unemployment. Even as the economy starts improving, we’ll have people losing their jobs as jobs and growth move from sector to sector in the economy.

We’ll probably need another $3 million to $4 million commitment before all is said and done. We’re at about $7 million now. The magic number will be $10 million to $12 million between CU Harp and our own modifications.

At some point the economists will tell us we’re not in a recession and we’re seeing positive economic growth. But the general consensus is we won’t feel good about it. It won’t feel like a recovery.

Median home prices have started to stabilize. Unfortunately, the media tends to report median home prices as June 2009 vs. June 2008. Those numbers are still down, even for us.

I prefer to look at June of this year compared to May of this year. We’ve seen median home prices starting to increase. Part of that is seasonal, but at least we’re not seeing prices drop on a month-to-month basis, which is what we saw from late last summer through March of this year. There’s so much bad economic news we need to have something to feel good about.

We’ve been very successful in selling our foreclosures. We’ve probably sold 10 [houses] and we only had 19 in stock three months ago. We sold 10 properties in the last three months. The average marketing time is less than six months. It’s pretty positive.

We’re not simply dumping properties on the market. We’ll make the tough decision to put $5,000 or $10,000 into a house to make it market-ready. This way, someone can decide whether to buy the house under normal circumstances, not necessarily as a bank-owned property. Those properties have a stigma attached to them.

CU Mag: What advice do you offer other CUs about loan modifications?

Vogeney: Take as many factors into consideration as you can. What’s the member situation? Will it improve? What’s your collateral position? The worse your collateral position is the more motivated you should be to come up with a solution.

Your solutions don’t have to be permanent. We’ve shown that six-month to one-year reductions in interest rates and payments can make a lot of sense. You can give people the time they need to get back on their feet.

Also, don’t be afraid to throw resources at this. Don’t stick with the status quo.

Don’t think you have to hire a bunch of collectors to do this. You can have your member service staff and loan people talk to members who are having problems.

I’m not saying they’d make outgoing collection calls. Those are best left to experienced people. But you should be able to use some of your lending staff to help members and take incoming calls. We’ve moved people around tremendously.

Don’t be afraid to give up some interest income. If you make a $20,000 auto loan at 7%, you’ll make about $2,800 in a year. But if you repossess the car, you’ll lose thousands.

Get your hands dirty. Don’t assign modifications to a lower-level person. Push them up the organization as far as you can. It’s the most important thing we’ll do this year and next year.