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.
Members’ unique financial circumstances make it impossible to treat each loan modification the same, credit union lenders note.
Bill Vogeney details Ent Federal Credit Union’s approach to loan modifications. He’s senior vice president/chief lending officer for the $2.6 billion asset credit union, based in Colorado Springs, Colo.
CU Mag: What factors do you consider when deciding whether to modify a loan?
Vogeney: A lot of things. We determine the member's situation and need. We try to verify as much information as possible, such as the member’s income via paystubs or unemployment checks. We need to see just how dire the situation is.
Second, we consider whether it’s likely to be a temporary or permanent problem. If it’s temporary—the member has lost his or her job but will be able to find another job and have the income to support the debt—that’s a big factor. We’re more likely to come up with a creative solution if we see that.
On the flip side, if we don’t think a member’s situation will get significantly better, we may need to take other measures. If someone who works in residential construction lost his job, it’s more than likely he won’t find a job in this field within three to six months. Then it’s difficult to do anything to significantly help them in terms of restructuring a loan.
Many people look for short-term solutions—they want to skip a payment or two to get caught up. But sometimes a modification won’t help their situation, it will only postpone the inevitable. If we do something, we want to feel fairly confident the member will repay.
We also look at our collateral position and what the potential loss is: Are we keeping our situation the same, making it better, or potentially making it worse?
Let’s say someone with significant financial problems comes to us and they have a home equity loan. Originally, the loan-to-value (LTV) was 90%, but now it’s 105% due to current home values. The balance is $30,000 and we’re behind a $200,000 first mortgage. We’re not going to foreclose and pay $200,000 to buy out the interest on the first mortgage to pursue our $30,000 second mortgage. Our situation won’t get any worse—if the member defaults and walks away, the home goes into foreclosure and it’s a full loss.
If our situation can’t get any worse, we’ll do a more aggressive plan as compared to a situation where we have a good collateral position.
One recent example: We have a member who lost her job, has a small income, poor job prospects, and some health problems. She wants some assistance. We have a first mortgage for $80,000 and house is worth $150,000.
We have a good collateral position, we don’t think the member’s financial situation will get much better, and the member has a lot of credit card and other debt getting in the way of making her mortgage payment.
Our recommendation was to sell the house and pay down her debt with the equity. At least she’ll have a chunk of cash left over, and she’ll be able to rent an apartment for less than a house payment. And she won’t have the hassles of upkeep.
In some situations, you have to level with people and say, “Owning a home in your current situation isn’t the best thing for you. You need to get out from under this.”
CU Mag: That sounds labor-intensive.
Vogeney: It absolutely is. We’ve added staff and brought in people from other credit union departments to handle requests for assistance. We don’t need hard-core collectors; we need people who understand our members and know how to treat people with respect.
We have a couple of employees who look at more normal situations, where a person wants to skip a payment or two or wants to lower the interest rate on a car loan. Say a member has equity in the car but a high payment and 24 months left to pay. We may be able to refinance the loan over 48 months and lower the payment.
I personally look at every mortgage modification and every request that comes though the National Credit Union Administration’s CU Harp program, and each of our aggressive modifications on home equity and auto loans. That takes a couple hours of work per week out of my schedule. But I feel strongly that these need a great deal of attention.
CU Mag: Do you know what percentage of your modified loans default anyway?
Vogeney: Yes, we track it closely. We implemented a Member Solutions Program in January 2008 because a lot of people were having significant problems as the recession started, such as early job losses. We also had members who were heavily obligated where we stood to have a significant loss. These are good people to whom bad things have happened.
So we put together a plan where we allocated funding up to $5 million to modify existing loans. We’d reduce the interest rate to 0% for six months and lower the payment accordingly. If someone had a $500 payment, the modified payment for the six-month period was about $300.
Reducing the interest rate didn’t impact loan amortization. That’s important. You don’t want to slow loan amortization when you have a piece of collateral, such as a car, that’s depreciating faster than the loan balance is going down.
On home equity loans, we agreed to do temporary modifications for 12 months. A $50,000 home equity loan over 180 months, for example, may have a $475 payment initially. With the modification, the new payment is about $150 per month. It’s significant.
For this program, our delinquency as of June 30 was 3.78%. That’s a lot higher compared to our normal delinquency ratio of 0.6%. But this means more than 96% of members are paying on time.
We’ve all read the articles looking at mortgage modifications. Before the industry recognized the magnitude of the problem, we saw 60% to 70% failure rates on modified loans. I’m ecstatic with a delinquency ratio of just under 4%.
We made $5 million in modified loans, and we now have loans where the temporary modifications are maturing. Some of those people are still having problems. We figured that would happen.
About 70% of people we put into modified loans can handle their old payments now. About 30% are still having problems. Maybe they've gotten jobs, but those jobs pay half of what they were making before and they still need help. We’re satisfied with a 70% success rate. We originally thought it might be 50%. We’ll look at their situations and decide whether to modify their loans for another six months or a year.
It’s hard to determine how much it has cost us to lend $5 million at 0%. If we’d collected 6% to 7% on this money, we’d have given up $300,000 to $350,000 in lost income.
However, loss ratios at several of our peer credit unions have doubled. And these credit unions aren’t in ground-zero states like California and Florida. We’re talking about areas where we haven’t had a tremendous falloff in real estate values.
So we think this $300,000 investment in lost interest income has saved us $800,000 to $2 million in loan losses we otherwise would have had if we hadn’t been aggressive in helping members.