After A Tornado, Tuscaloosa Innovates On Mortgages

How an Alabama credit union built a double bottom line one non-traditional mortgage at a time.

On April 27, 2011, an F-4 tornado struck Tuscaloosa, AL, killing 52 people, including several University of Alabama students. The tornado was one of hundreds that touched down across the South during a four-day run of devastating spring weather.

The university’s Alabama Center for Real Estate counted 5,144 housing units damaged or destroyed. That included a large chunk of the city’s affordable housing inventory, says Tommy Cobb, longtime president and CEO at Tuscaloosa Credit Union ($60.7M, Tuscaloosa, AL).

Cobb’s credit union originally chartered to serve local postal workers captured only 2.9% of its community’s mortgage market at year-end 2014. But a baker’s dozen of those home loans are to people who sought financial education, saved $1,000 many for the first times in their lives and staked new claims in old neighborhoods that rebuilt after the tornado hit.

And TCU has been there since Square One.

Thirteen Down, Many More To Go


data as of 12.31.14

  • HQ: Tuscaloosa, AL
  • ASSETS: $60.7M
  • MEMBERS: 6,700
  • 12-MO SHARE GROWTH: -2.22%
  • 12-MO LOAN GROWTH: 3.68%
  • ROA: 0.69%

TCU has closed 13 loans through the Square One program it launched in partnership with the Tuscaloosa Housing Authority in May 2011, less than a month after the tornado. That includes five in one day, on June 26, 2014.

Applicants generally hear about the program word-of-mouth or from the housing authority, Cobb says. Typically, three prospective new homeowners are selected from a field of 10 or 12 applicants. Participants then must save $1,000 and complete a program that includes standard financial education and more.

We give them advice on things like how to clean up their credit, Cobb says.

The program will even take the additional step of working with creditors, like the cell phone company, to work out a payment plan. But even after the program selects and works with applicants, homeownership is not a given.

It’s amazing how many people want to own a home but don’t want to do it what it takes to get there, Cobb says.

Along with getting a house, though, those who do complete the course so far have typically improved their credit scores from around 550 to 710 over a period of 18 months.

As for the homes, the three-bedroom, brick-sided structures average 1,400 to 1,500 square feet. The housing authority provides the home lots, which were often condemned as a result of the storm, and local builders bid on projects that typically include three or four houses at a time.

Then, instead of standard underwriting criteria, TCU focuses on employment records and letters that verify the ability to make the house payment. Ability to repay is especially important not only for legal and compliance reasons but also because TCU holds and services the loans. As such, TCU collects escrow and uses it to pay the insurance and property taxes.

One of the homes that Tuscaloosa Credit Union has financed in a neighborhood hard-hit by a spring tornado in 2011.

The homes cost approximately $100,000. After putting in the $1,000 as a down payment, homeowners take on a $60,000 mortgage, approximately, which they finance for 20 years at an average fixed rate of 5.25% APR. The city and the housing authority cover the remaining $40,000 through a second mortgage that does not require payments and is forgiven in five to 15 years. If the buyer does default, TCU has the first lien.

How It All Adds Up

Check out the slideshow that compares Tuscaloosa Credit Union’s performance against its asset-based peer group.

To date, only one homeowner has missed a payment, and that was only once.

She loaned the money to a relative instead, Cobb says. That’s typical of these close families and neighborhoods. He paid her back, but now she understands that’s probably not a good idea anymore.

Next: Profitable And Efficient

Getting Down To Dollars

The positive payment history combines with a favorable loan-to-value ratio and large, guaranteed second mortgage to give TCU a less risky portfolio than many credit unions its size. According to Callahan data, TCU’s provision for overall loan loss in 2014 was $88,000, compared with $167,143 on average for the 753 credit unions of $50 million to $100 million in assets nationwide.

Square One mortgages comprise $2 million of TCU’s $11.3 million first mortgage portfolio that it holds on his books. And that is all Cobb is comfortable lending at this time. TCU currently is working with the National Federation of Community Development Credit Unions to sell Square One loans to the organization’s CDCU Mortgage Center.

We appreciate the federation working with us on this, Cobb says. Being able to sell these would allow TCU to make an impact with our loans. As a matter of safety and for concentration purposes, a credit union our size can only make about 20 fixed-rate, long-term loans like that. With the federation’s partnership, we can make unlimited loans.

Eben Sheaffer, the federation’s chief financial and investment officer, calls TCU’s program a great example of a double bottom line. That’s the idea of investing for both a monetary and social return, and experienced local lenders are in a good position to make that happen.

They can lend in a way that is financially stable and healthy for the institution and helps them fulfill their mission, Sheaffer says.

In this case, that’s providing affordable homes in a market where prices have sharply risen as higher-priced new housing stock replaces much of the lower-priced housing flattened by the tornado.

Profitable And Efficient

TCU is a profitable credit union, and efficient. It earned $2.2 million from interest on loans in 2014, slightly higher than the $2.1 million for its nationwide peer group. Net income, however, totaled $425,520, compared with $331,316 for its nationwide peer group.

The Alabama credit union posted $1,167,428 in annual loan originations per employee at the end of fourth quarter 2014, compared with the $748,056 average for asset-based peer and $776,923 average for the state’s credit unions.

TCU’s year-end efficiency ratio of 85.41% also compares favorably with the 89.65% average for the nation’s $50 million to $100 million credit unions. And its return on assets was 0.69% compared with 0.47% for similarly sized credit unions.

Doing Good While Doing Well

Some other numbers speak to the credit union’s value to the community. For instance, its 12-month member growth was 3.88% compared with 0.53% for its peer group.

Realizing they can save money and own a home is the most empowering thing a person can learn in this program. They never realized before how they can control things in their own lives.

And the credit union shines when it comes to Callahan’s Return of the Member index, which quantifies member value based on lending and saving rates and member usage. The 6,700-member TCU scored 96.55, placing it 27th among the 753 credit unions in its asset-based peer group nationwide.

The intangibles, meanwhile, include the impact of helping to rebuild a devastated community while bringing lower-income residents back into mainstream financial services.

Those are our big goals, Cobb says.

The idea that neighborhoods benefit from a core of responsible homeowners is not revelatory, but the way TCU’s borrowers feel after completing the program, saving the $1,000, and buying their own home is definitely something new.

Realizing they can save money and own a home is the most empowering thing a person can learn in this program, says the TCU president. They never realized before how they can control things in their own lives.

April 3, 2015

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