Wait and See Workouts

Why implementing a multi-year, long-term workout solution can help members and credit unions emerge from the mortgage market unscathed.


When author E.T Bell first stated "Time makes fools of us all" he must not have known much about the credit union industry.

In an economic and employment environment homeowners equated to Armageddon, last year's groundbreaking mortgage modifications represent not only new tools for the credit union industry but also beacons of hope for members.

A staggering Freddie Mac statistic puts the average cost of foreclosures for financial institutions around $60,000 per home. This means refinancing mortgages is a necessity to hold communities of homeowners together and to help credit unions avoid the foreclosures that, in great enough numbers, could drag them under.

As it turns out, the best way to keep struggling mortgages in workable positions long term involves more than just running the numbers game; it also involves adopting a "wait and see" approach.

In a May 2009 webinar on mortgage modifications, representatives from credit unions on the East Coast came together to formulate battle plans for new lending challenges. By their own admission, the modification and extension strategies of these credit unions were newly formed and somewhat unproven.

"There are not a lot of experts out there," explained Craig Roy, senior vice president of support services at Digital Federal Credit Union ($4.23 B, Marlborough, MA) in the presentation "It's really about coping right now."

This sentiment was mirrored by GTE Federal Credit Union ($1.95 B, Tampa, FL), which in 2007 experienced the first real estate delinquencies in its history.

The charge-offs at GTE that year amounted to $2.4 million. At the time, the only option GTE offered struggling mortgage holders was loan extensions up to six months. These short-term extensions did little to delay foreclosure, and by 2008, charge-offs at GTE had jumped to $16.2 million.

These numbers prompted GTE to begin its "We Can Help" outreach effort to give struggling members new options. It lowered interest rates to 2% in some cases and also began experimenting with a simplified two-year balloon, after which time the full mortgage would become due.

"Every six months we pull new credit reports from these mortgages to see if the situation has stabilized, gotten worse, or gotten better," says Kim Yarnelli, vice president of real estate services at GTE.

If the credit score or financial situation has improved in two years, the goal is to move the member to a different restructured product. If not, Yarnelli says, GTE will extend the two-year workout once more. This new approach allows members the crucial time needed for their financial situations to improve, avoiding the fate of the nearly 2,900 borrowers that lost their home each day in 2009.

By May 2009, GTE had restructured $15 million in mortgages with a fallout rate of 27%.

"Is two years the magic number?" Yarnelli questioned at the time. "Hindsight is 20/20."

Taking workouts to such a degree left many in the industry holding their breaths to see what 2010 would have in store. This year, as the first of GTE's two-year mortgage balloons come to term, the results are more than encouraging.

"We're seeing in different ways than we did back in 2008," Yarnelli says. "We're finally starting to see light at the end of the tunnel."

The approximate 338 mortgages GTE has restructured for nearly $35 million have an impressive success rate of 81%.

GTE "works the maturity," extending loan lengths to give members manageable payments and providing workable interest rates. "We certainly don't want the property back, so why not extend it for another two years?" Yarnelli says.

The housing market in Florida has stabilized somewhat and GTE's extensions have given many members time to find gainful employment. But the credit union is still doing its part to help members better meet their mortgage demands. To that end, GTE has also taken on a counseling role in helping members adjust their lifestyles.

When all else in the equation fails, GTE's results prove time may be a crucially overlooked factor and the key to making troubled mortgages work long term.




March 29, 2010


  • a discussion we were just having this morning - very timely and it's nice to see others are asking the same questions