The headlines tell us that thousands of families across the nation are headed to foreclosure each month- some parts of the country are hit harder than others. Why is this happening now and how could credit unions be an important part of the solution?
As real estate values soared over the past few years, the mortgage industry exploded with new products designed to get more people into more expensive homes. Lending rules were relaxed and flexible features were added to loans. Some of these enhancements proved to be beneficial to responsible consumers who needed an opportunity to move from renter to homeowner. Other enhancements turned out to be risky to the average family that may not have been prepared for a decline in real estate values.
The most common of these exotic loan products is known as an "Option ARM." This adjustable-rate mortgage often starts out at a very low interest rate, but that rate could change more frequently than the typical conventional ARM. The borrower has the option to pay the fully amortized monthly payment, only the interest due for that month (no amortization of the principal), or an amount that is lower than the interest due (negative amortization). As interest rates rise, the payments may increase significantly. If the member cannot make the payments, the principal balance has increased from its original position and the real estate market has devalued the collateral, the homeowner faces the prospect of foreclosure. The sad truth is that this is not an unusual story in today's times.
The homeowner has a few choices at this point. Either they could forfeit their home or face foreclosure proceedings. They may have the option to deed the house over to the lender and then lease it back according to a negotiated agreement. They may even be able to refinance their loan in the sub-prime market or with a "hard money" lender (but even if this was possible it may only be a temporary solution, as they'd probably end up in greater financial distress). Finally, they may be able to get a "rescue loan" from a safe and reputable lender-namely their credit union.
What is a rescue loan? Well, there's no set program named "Rescue Loans." It's just a set of options that a credit union has at its disposal to help a member save their home. We've spoken to several credit unions nationwide that have employed some or all of these tactics and the results have been overwhelmingly positive.
Work with a Fannie Mae-approved seller/servicer who is participating in their HomeStay Initiative. This is an expansion of their existing program geared specifically to the purpose of keeping families in their homes. It now allows 40-year terms of their Expanded Approval loan products (designed for individuals who may have imperfect credit) with up to 100% financing.
Consider offering portfolio loan products that are designed for this purpose. Some credit unions will even set aside an amount of funds that is available for these loan types at special rates. Here are some examples:
* 80/20 loans. This is an 80% loan-to-value first mortgage with a simultaneous 20% second mortgage. Check with your local mortgage insurance provider to learn more about protecting your credit union in this type of situation.
* 100% or higher financing for certain loans to be held in portfolio. The credit union may choose to set aside special reserves to cover any collateral that is at risk, i.e., principal over the amount covered by mortgage insurance.
Some credit unions have set aside a portion of funds to "bail out" their members whose homes are at risk of foreclosure and that are under-collateralized. A credit union in Florida recently promoted this type of program to their community and had an overwhelming response. They set aside a certain amount of money and provided funds for members that would bring their loan-to-value ratios down to 100% and also cover closing costs. The mortgages are held in the credit union's portfolio-or sold to an investor when eligible. Needless to say, the local newspapers and television stations covered this "good news" story to the great advantage of the credit union. The better news is that several families in that community are sleeping easier, in their own beds.
So if today's headlines are telling us that thousands of families across the nation are headed to foreclosure each month, perhaps credit unions with their "rescue loans" can be on the forefront to reverse this trend. This movement benefits credit unions in two ways: First, and most importantly, it helps members and their families who are in need of financial direction to help them remain in their homes. Second, it spotlights credit unions' secure, stable and innovative reputation nationwide-which can only bolster the industry's standing for consumers who looking for a reliable alternative for their mortgage needs.
Jill Peterson is VP-sales and marketing at CU National Mortgage and can be reached at 973-244-7100, ext. 1024 or jpeterson<at>usmtg.com.