CU Embraces 'Make Sense' Approach to Lending

June 23, 2010

When Lyle Wermund determines whether to modify a mortgage, he asks one key question: Does the loan make sense?

Finding the answer to this question requires examining the value of the collateral and loss potential, the member’s credit history and ability to repay, the member’s long-term employment prospects, and whether additional time will make the situation better or worse, explains Wermund, loss mitigation manager for $313 million asset Blackhawk Community Credit Union in Janesville, Wis.

“The goal is to restructure the loan so it’s successful regardless of what happens, barring job loss or them walking away from the house,” says Wermund. “If we can buy time, hopefully the situation will heal—property values will come back, people will get jobs, and we’ll start to recover.”

Janesville, a South Central Wisconsin city of 60,000, has an unemployment rate of about 13% following the closure of a General Motors (GM) assembly plant that was a city mainstay since 1919.

Wermund explains his role as loss mitigation manager and how the loss mitigation department helps members and minimizes loan losses.

CU Mag: Can you tell us about your current role and how it came about?

Wermund: I’m the loss mitigation manager. I handle all foreclosures, litigation accounts, and short sales related to mortgages.

I was approached to head up loan quality assurance for the mortgage department but got sidetracked into loss mitigation during the economic downturn. Two other employees work with me, handling the paperwork, reporting, and processing of modification applications.

CU Mag: How has your experience as a mortgage originator help prepare you for your current role?

Wermund: It goes back more to the consumer finance days or equity lending. We manually underwrote all loans, and the key to getting an approval was to structure the loan purpose and terms into a “make sense” package.

CU Mag: What factors do you consider when deciding whether a workout loan makes sense?

Wermund: We look at a number of things. What’s the value of our collateral and are we putting it at more or less risk by going forward with a workout? What’s the member’s credit history, ability to repay, and long-term employment prospects? Will time heal the situation—or make it worse?

I was one of the first managers in California allowed to underwrite broker-originated packages. As we know, that industry has had people with not the best reputation. So it’s important in underwriting to read between the lines, not just read the lines themselves.

Handling workouts, one also has to package the mortgage with some ingenuity that will both help the borrower and protect our investment.

CU Mag: How has your approach to helping members with problem mortgages changed over the years?

Wermund: You have to understand that some people may just continually pay slow and not manage their lives well. There are others who have just come across some bad circumstances.

I’ve always believed there are only two reasons people don’t pay: ability and attitude. Most times we can do nothing about the ability. But by reaching out with a helping hand, sometimes we can change the attitude. Doing that with “make sense” terms can produce a win-win conclusion.

CU Mag: How do you change a member’s attitude?

Wermund: Sometimes it’s a matter of reaching out and conveying that we want to help them, but we need help from them—they need to return our phone calls and maybe give us some documentation to let us assess the situation.

Then there are people who still don’t change and you have to take the vinegar approach, maybe starting a lawsuit to show we won’t just go away. Then, even after the papers are served, members have come back and said, “I guess you mend business. Let’s talk.” And we can work it out.

CU Mag: What’s your approach to mitigating mortgage losses?

Wermund: Obviously, Fannie Mae dictates a lot of what we can do on their loans. With loans held in portfolio, it goes back to the “make sense” approach. You have to look at loss potential, ability, and history, and consider whether time will heal the situation or make the matter worse.

CU Mag: How do you help members avoid foreclosure?

Wermund: We try to make early contact and convey the idea that we’re here to help. We gather facts and suggest solutions.

CU Mag: How many members do you work with in a typical month?

Wermund: That’s hard to put a number on because there are so many accounts that are ongoing problems. We probably get five to 10 new accounts each month, but we currently have about 50 ongoing foreclosures that get regular follow-up.

Our modification crew runs about 35 to 40 pending applications and 15 to 20 trial programs. Compared to the industry, which has completed maybe 12% to 18% of their modification applications, we’ve completed more than 40% of our applications.

We’ve helped upwards of 150 to 200 members since implementing the loss mitigation department.

CU Mag: What are some early signs that a member might be heading toward financial difficulties?

Wermund: Payroll deposits stop or there are bounced checks or overdraft charges. Also, denial and refusal to communicate.

CU Mag: At what point do you contact members who show signs of financial problems?

Wermund: We send notices after 16 days, followed by phone calls. Around 45 days, the borrower usually has received a letter soliciting multiple solutions and giving them my name and number to call at the credit union.

CU Mag: How receptive are members when you approach them?

Wermund: Depending on the circumstances, the key is getting the message to them that we’re their friend even though the outcome may not always be the best.

We overcome members’ reluctance to talk to us by making continued efforts to make contact all through the process. If they see we are urgent about helping them, they are more willing to communicate.

CU Mag: How has Janesville changed since GM first started to downsize its operations there?

Wermund: Employment numbers are still very grim. Many residents have taken transfers. It will take time for the community to back-fill the loss of jobs that resulted from the plant closure.

But in the long run, the community will probably come back stronger and not so dependent on one employer.

CU Mag: What have you learned from your efforts?

Wermund: I’ve learned that you have to make the best out of whatever circumstances you are faced with rather than wringing your hands. Denial kills and paralyzes.

I have worked with this philosophy my entire career. I still remember a boss who told me many years ago, “Work your programs all month long on a daily basis and the magic [the results] will be there at month end.”

CU Mag: What advice do you offer other CUs that are in the same boat?

Wermund: Assign someone to be responsible for loss mitigation. It’s a fact of life in the current economy. Denying the need to put manpower to it will cost more in the long run.

The person handling this has to know what he or she is doing, and be a problem solver and innovative thinker. Solutions may sometimes have to be off the wall but temporary. Analyze whether each [problem loan] is an ability problem or attitude problem.

CU Mag: Anything else you’d like to add?

Wermund: I noted some changes in Fannie Mae’s underwriting policies for prior foreclosure, deed in lieu, and pre-foreclosure sale credit issues. It seems underwriting is starting to slowly soften, which usually is an indicator that we’ve turned or are turning the corner.

If we can buy a little time with these accounts, we will hopefully be able to save them.