Credit Unions Soothe Housing Market Woes

Each mortgage modification a credit union makes to help members avoid foreclosure keeps the housing market in better health.

Credit unions across the United States have been trying to help reverse ailing housing markets in their communities, and several positive economic market reports indicate housing is recovering. But credit unions are still pushing the recovery along, especially in communities that continue to grapple with higher foreclosure rates and slower home sales.

The housing market is pivotal to a local economy. Communities with strong housing markets require jobs and support growth in businesses such as real estate brokerage, real estate development, and building supply and manufacturing. But while there are glimmers of recovery in the housing market home prices inching up in some areas, foreclosure rates waning in others this sector of the economy still weighs heavily on the overall recovery.

Nationally, home prices appreciated approximately 0.2% in June 2012 from the same quarter a year prior, which is the first annual increase in home value since 2007, according to Zillow Home Value Index, which measures 167 metropolitan areas. Home values averaged $143,000 in the second quarter, still far from its peak of $197,000 in 2007. Foreclosure activity is down slightly year-over-year; however, it was higher in the first six months of this year compared to the last six months of 2011 in 59% of metropolitan areas measured by Irvine-based RealtyTrac. New home sales are expected to reach 600,000 by 2013, which is still far from the pre-recession peak of 1.2 million in 2005, according to the National Association of Realtors.

Struggling Homeowners Need Proactive Credit Unions

To recharge their local housing markets, credit unions are working closely with members to help them avoid foreclosures, educating members about home buying, and offering mortgage products that ensure members will find a perfect loan for a new home. Patelco Credit Union ($3.8B, Pleasanton, CA) is among the many credit unions pushing the housing rebound further along. So far this year, it has modified 31 mortgages more than $10 million in loans and beefed up its collection process to work more efficiently with delinquent borrowers.


Every loan modification that we’re able to process and work with our members to avoid foreclosure, then that’s one less REO that we add to the housing inventory, says David Luu, vice president of collections for Patelco. In that sense, it helps to stabilize the housing market.

This year, Patelco fine-tuned its default management program to make it more consistent and ramped up quality control with monthly reviews of successful phone calls. It has documented guidelines that advise collectors on how and how frequently to make collection phone calls as well as when to send letters. The new process, outlined in the credit union’s Default Management Quality Assurance Plan, underscores consistency. As part of the plan, Patelco records all of its collection calls and managers review them on a monthly basis to provide a performance rating for staff.

Luu says articulating the standards for telephone calls has worked well for the credit union because it can quickly spot and address performance issues. And as Patelco better connects with delinquent borrowers, it can engage members in repayment alternatives to keep them in their homes.

At the end of the day, that’s where the rubber meets the road where the staff is working with the members, Luu says. And drilling down to review its processes has helped Patelco get a better handle on those staff/member communications.

Partly as a result of Patelco’s outreach, the number of Notice of Default filings, which is the first step to initiate foreclosure, decreased 50% in July compared to July 2010. The number of REOs has declined as well, although Luu says foreclosures and default notices are still high compared to pre-recession levels.

Our goal is to work with members to preserve homeownership, so we will continue to work to pare down our REO number, Luu says.

When Patelco cannot help members avoid foreclosure, either because they walk away from their loans or because they cannot afford the modified alternatives, it turns to its real estate agent program. Credit union staff works with local realtors who have the credit union’s REO properties so they can market them quickly and maximize the sale of those properties.

Patelco also ensures the foreclosed properties are in good condition so other properties on the block don’t suffer declining values. The aggressive preservation plan calls for a weekly inspection, lawn care, and prompt attention to maintenance issues for each REO property. This practice contributes positively to the local economy by preventing blight that would affect the entire neighborhood, Luu says.

Lessons In Home Buying Boost Confidence

As credit unions like Patelco aid struggling homeowners, other credit unions such as AMOCO Federal Credit Union ($588.9M, Texas City, TX) are helping the housing market by providing free educational sessions that give first-time homebuyers more confidence to buy. In the Texas area, home prices are edging up, making many would-be buyers leery of purchasing right now, says business development specialist Jennifer Demers.

From October 2011 to April 2012, AMOCO sponsored Earn or Burn Home Edition, an eight-seminar series on buying a home. It was so successful the credit union is hosting the series again starting in October. The hour-long seminars, which are free and open to the community, touch on different aspects of the home buying process from understanding credit scores to determining how much house you can afford. The roughly 30 attendees learned about differences among loan types and how insurance works.

Credit unions are here to help our members and help the community be more financially successful.

We pride ourselves on being active in the community, Demers says. Credit unions are here to help our members and help the community be more financially successful. If we have more financially successful members, we have happier, more loyal members.

The financial literacy seminars are intended to reduce the stress in home buying as well as let the community know we are here for them, Demers says. The credit union provides incentives for attendance, including a $2,500 drawing prize for those who attend all seminars and smaller door prizes each month. The sessions strive to be fun and engaging. Most attendees are about a year away from purchasing a home, but the credit union has had a few mortgage applications as a result of the sessions.

It’s important for our members to be educated in the process of mortgages, Demers says. Especially with the home buying process, there are so many rules. Credit unions have always been into financial literacy. It’s just finding that topic of what’s affecting your community.

Credit Unions Tailor Mortgages To Local Demand

Credit unions are also fostering mortgage activity by offering products that go beyond the 30-year fixed loan. Financial institutions view 30-year fixed loans as risky in today’s low interest rate environment. Instead of closing out credit to homebuyers, though, credit unions are offering hybrid, adjustable-rate products that serve both the credit union and the member.

Credit unions have been claiming bigger shares of the mortgage market in recent years in part because they have more flexibility with their product offerings and can meet members’ loan needs. Pentagon Federal Credit Union ($15.2B, Alexandria, VA) is among the credit unions that have been trying to find the perfect mortgage offering for members, and it seems its efforts are paying off. The credit union reported a $9.31 billion real estate loan portfolio in the second quarter, up 0.17% from a year prior.


The credit union offers a 5/5 ARM that adjusts on a five-year cycle instead of annually, which helps ease members’ interest rate fears. Each adjustment caps at 2%. For the life of the mortgage, PenFed has set the adjustment rate cap at 5%. That means if a mortgage’s initial rate was 3.5%, the interest rate would never exceed 8.5%. And payments for a 5/5 ARM don’t change as frequently as for other adjustable rate products, giving the homeowners time to build equity.

PenFed also offers a 5/1 ARM that adjusts every year after the first five years. The 5/1 ARM offers a lower rate that the 5/5, but it can increase 5% on the first adjustment.

We firmly believe in the concept of being a cooperative, says PenFed CFO Rocky Mitchell. We want to drive as much value back to the member as possible. If I was running a for-profit business, I wouldn’t be making this argument.

State Employees’ Credit Union ($25.1B, Raleigh, NC) has also been fine-tuning mortgage products to shore up niche markets. After 10 years of developing its ARM mortgage product, State Employees’ landed on a two-year ARM that starts at 3.75% and is capped at 9.75%. The cooperative had tried one-year, three-year, and five-year adjustable rate mortgage products, but members complained the credit union was transferring too much risk to the consumer, says Phil Greer, senior vice president of mortgage lending.

State Employees’ Credit Union had roughly $11.8 billion in mortgage loans in the second quarter, up 0.03% from the same quarter a year prior. Approximately 90% of the credit union’s mortgages are its two-year ARM products, Greer says.

It’s a matter of identifying a need and filling a need where it makes sense, Greer says. We’ve taken the two-year where we’ve seen the need and incorporated more features. It’s worked out quite well for us. They’ve overwhelmingly accepted this product.

Want to learn more? Click on the articles in the Subscriber Package below for a deeper dive into Cooperative Strategies.

Subscriber Package: Cooperative Strategies
How To Invigorate Your Local Economy
Small Business Saviors
Credit Unions Hammer Away At Unemployment
Credit Unions Soothe Housing Market Woes

May 29, 2014

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