Seeing a delinquent real estate loan was a rarity for many credit unions, with 1st mortgage delinquency floating between 0.2% and 0.4% up through summer of 2007. But then the housing bubble burst. In 3Q 2008, RE delinquency reached 1.00%. While still lower than the industry average loan delinquency rate of 1.13%, the rapid growth of mortgage delinquency has been a red flag to many credit unions.
Desert Schools FCU ($3.2 bn assets) has recently had to confront this reality. In Arizona, the mortgage market has been especially difficult. The S&P/Case Shiller Home Price Index shows Phoenix home prices declining faster than the 10- and 20-city composites.
Source: S&P / Case Shiller
According to Daniel Thomas, Loss Mitigation Manager, Desert Schools had not seen much in terms of real estate delinquency for quite some time. Their real estate delinquency did not break the 0.2% mark until 3Q 2007. A year later, they hit 1.45%. This was the same time period when Arizona real estate prices experienced rapid decline. With many Arizona residents upside down on their mortgages, the threat that members could walk away from their homes is very real. The real estate delinquency growth prompted Desert Schools to develop a model to address the issue, as this graphic illustrates.
The process begins when a member is identified as being in need of assistance. Typically, the Credit Assistance Department (comparable to Collections) will review the credit union’s delinquency portfolio for members who are at least 30 days delinquent on their mortgage and appear unable to handle their current payment plan. Some members contact the credit union preemptively.
Members are then funneled into the Loss Mitigation Department, which takes an individual look at each member and the reason behind their inability to handle their current payment plan. Members eligible for refinance are sent to the Mortgage Lending Department. For the remaining members, Credit Assistance pursues one of three solutions: modification (including temporary forbearance), short sale, or foreclosure.
For example: Credit Assistance would negotiate a modification where a 30-year first mortgage would increase to a 40-year term. The rate would initially go down percentage points, step up one percentage point per year for three years, and the, lock at the original rate for the remaining 36 years. For a member facing short term economic hardship, such as a lay-off, modification allows them to temporarily shoulder a smaller monthly burden. If modification fails, or is not possible, then Desert Schools will short sell or foreclose on the property.
Desert School’s model of loss mitigation accomplishes two things. First, it protects the credit union as an institution; the model efficiently helps minimize potential losses endemic to larger mortgage delinquency portfolios. Second, just as importantly, it creates a system where the credit union is constantly working with the member, maximizing the credit union’s potential to keep members in their homes.