TUSCALOOSA, Ala.-After some big banks backed out of a low-income housing project here, Tuscaloosa CU has stepped in to help struggling first-time homeowners achieve their dreams.
TCU has provided funding for four modest homes for first-time homebuyers with poor credit and is preparing to close on five more, something Willie Fort, executive director of the Tuscaloosa Housing Authority, says is critical to a housing project that has been in place since 2009.
"We had some banks here sign on with us to provide funding, but now, due to some changes in mortgage rules, they are backing out. It left several potential homeowners in a bad place, with no place to get a loan."
Learning about the banks' actions, the $54-million TCU decided to step up its participation. What is allowing the CU to make the loans is being flexible with underwriting requirements to work with credit-challenged borrowers, and to take a little more risk than the banks are willing to do.
CEO Tommy Cobb explained that the big hurdle the banks refused to step over was the fact they would not be able to sell the loans to the secondary market due to wrap-around second and third mortgages attached to the homes. He explained the Housing Authority program, seeking to reduce the price of the home and to keep the new homeowners from reselling at a profit, coordinated about $40,000 in funding in the form of second and third mortgages. THA provided $15,000 and the city $22,000.
"These homes are valued at about $110,000, leaving around $70,000 left to finance," said Cobb, who explained that if the homeowners remain in the home for five years the $15,000 loan is forgiven, and if they remain for 15 years the $22,000 is dismissed. Residents never make payments on the second and third mortgages as long as they meet the occupancy requirements. Tuscaloosa CU is charging 6% fixed for 20 years.
Increased Risk, But...
Cobb admits that keeping a concentration of loans on the books in one area of the city is not always the best underwriting decision, but stressed, "we are not selling them off. We are committed to putting that money aside for the city. We believe in the Housing Authority and the program, and we are committed to seeing these five more homes occupied."
It takes perseverance on the part of the homeowners and lender to really close these deals, explained Cobb. Borrowers must complete an eight-week financial education and home maintenance course, and save at least $1,000 for a down payment. But Cobb said many of the borrowers come with credit scores in the 400s to low 500s. "We look for some non-traditional means to qualify them-rent and utility payments, any alternative way we can see to raise their scores."
Fort said that most of the borrowers by the time they close have lifted their FICO scores to about 600. "These are very credit-challenged borrowers, and getting them into their first home is a huge event in their life. They get very emotional at the closings. When they move in, it's a family event-brothers and sisters show up to help and celebrate. Thank goodness the credit union stepped in and helped out. They are doing a great service for this city."