The Mortgage Crisis
It's Bad Now and the Immediate Future Doesn't Look Much Better —
but Credit Unions Can Offer a Ray of Hope.
The numbers tell the story. And behind each number a real person or family is hurting.
In 2007, some 2.2 million U.S. households — one in every 100 nationwide — were facing foreclosure, up 75 percent from the previous year. According to real estate marketing company RealtyTrac, foreclosure filings continued to rise at the end of 2007, with December marking the fifth straight month of more than 200,000 foreclosures reported.
A collection of factors — rising unemployment, losses on Wall Street, a shrinking credit market, declining real estate values and unsound underwriting standards — have combined to turn an issue into a problem, a problem into a crisis. In a vicious circle, the billions of dollars in losses have resulted in lenders putting money out of reach for many borrowers who had depended on getting new loans or refinancing an adjustable mortgage before these loans reset at higher monthly payments. And lower appraisals on homes have also prevented borrowers from refinancing into loans with easier terms.
In Michigan, the situation is particularly worrying. The Great Lakes State trailed only Nevada and Florida among states with the highest foreclosure rates last year. And Michigan’s Wayne County holds the dubious distinction of having the highest foreclosure rate in the country, with nearly 5 percent of Wayne County households at some stage of foreclosure in 2007 — 4.8 times the national average.
A recent study indicated that the average U.S. home lost 6.5 percent of its value in 2007 — the steepest one-year decline since the Great Depression. And a congressional Joint Economic Committee report has warned of billions of dollars in lost wealth, property values and property tax revenues as a result of foreclosures and declining home values.
Ironically, given the abundance of bad news, the mortgage industry’s black cloud may have a silver lining for the nation’s credit unions. “When the going gets tough, credit unions become more relevant,” notes MCUL President/CEO David Adams. Just as the economic turmoil of the 1930s provided the impetus for the passage of the Federal Credit Union Act, today’s financial difficulties gives credit unions a unique opportunity to underscore the difference between financial cooperatives and for-profit financial institutions — not only to their members, but in the eyes of consumers, lawmakers and the media as well.
That effort is sure to strike all observers as all the more significant since credit unions have played virtually no role in the current crisis.
Says Adams: “Some credit union officials will certainly ask the question: ‘Why should we help clean up a mess that isn’t ours?’ The answer should be our shared responsibility to our state and the communities we serve, as well as the benefits associated with helping to create a more positive economic climate. Doing little or nothing shouldn’t be an option, given the credit union mission.
“Credit unions exist both for their members and for the future members who can benefit from our good works. The reality is, people need our help — and we should be up to the task of giving it to them.”
Naturally, any assistance must be within the bounds of fiscal prudence and a credit union’s fiduciary responsibility to all its members. No single credit union — nor the entire credit union movement — has the resources to bail out every homeowner in distress. The MCUL and CUNA are encouraging state and federal lawmakers to provide clearer guidance on the level of risk that credit unions can take in the area of serving existing and new members with consumer-friendly mortgage products.
“Our goal should be is to make a meaningful contribution to fixing the problem, not to solve it entirely,” Adams says. “The people we can help won’t be those who are simply in too deep over their heads, or those who can be helped through other voluntary programs already out there. Our target should be the group of individuals who are in the ‘middle tier’ — those who can turn their situation around, provided they get a helping hand.”
Much of the December 2007 MCUL Board of Directors meeting was devoted to the nation’s foreclosure crisis and its rippling effects on consumer spending, tax revenue and job creation. In response to the growing problem, the MCUL hosted a “Mortgage Crisis Summit” on Jan. 10 at the Michigan Credit Union Center in Northville Twp. The event drew some 40 on-site attendees in addition to more than 100 phone and Internet participants.
At the Summit, Adams and MCUL Executive Vice President Patrick La Pine provided participants with an overview of both Washington’s and Lansing’s response to the mortgage crisis. State and federal legislative proposals have included registration/licensing requirements for mortgage brokers; authorizing MSHDA (Michigan State Housing Development Authority) to offer mortgage refinancing for single-family homeowners; criminalizing and establishing stiff penalties for residential mortgage fraud, such as inflating appraisal values to secure loans larger than the actual value of the property; requiring that borrowers receive a one-page “plain English” mortgage disclosure statement; prohibitions on steering prime borrowers to more expensive sub-prime loans; allowing a mortgage holder to ask a bankruptcy judge to reduce the interest rate and extend the length of a mortgage if the foreclosure process has been started; and requiring the Department of Housing and Urban Development (HUD) to lift existing caps to provide additional financing to curb foreclosures by allowing for additional refinancing of at-risk sub-prime borrowers.
In addition, President Bush signed into law the Mortgage Forgiveness Debt Relief Act in December. H.R. 3648 provides temporary tax relief to homeowners who might lose their home to foreclosure or who negotiate a loan modification. La Pine stressed that the MCUL and CUNA are working to ensure that any mortgage relief legislation approved by the Michigan Legislature or Congress is not harmful to credit unions.
Part of the Michigan Legislature’s continuing exploration of legislative proposals to aid in the mortgage crisis and tighten state regulation of the home lending industry included receiving testimony from LAFCU (LN) President/CEO Robin Frucci. Frucci appeared Jan. 29 before the Michigan House Appropriations Investigations Subcommittee during hearings that raised the possibility of tighter state regulation on the home lending industry.
Nearly two months earlier, the MCUL president/CEO had an opportunity to appear before the Michigan House Banking and Financial Services Committee — conveying the message that credit unions are not part of the problem but have helped educate consumers on mortgage loans. During his testimony, Adams summarized the nature of credit unions as not-for-profit financial cooperatives, citing credit unions’ low delinquency rates compared to financial institutions offering sub-prime loans and the programs implemented by many Michigan credit unions to help educate consumers about the dangers of exotic mortgages.
The Mortgage Crisis Summit agenda focused on possible credit union industry responses, including the proposed Home Saver Loan Program (HSLP), the object of discussions among a coalition of the MCUL, the Michigan Bankers Association, MSHDA, the Granholm Administration and state lawmakers.
The coalition would seek to make approximately $1.5 billion available to assist borrowers facing foreclosure losses, targeting for assistance approximately 10,000 borrowers who fall in the second of three risk tiers — too risky for unassisted loan modifications but capable of making payments if loan terms are modified. A private mortgage insurance solution and/or “excess risk pool” would help cover risks associated with 20 percent of the loan. Approximately 50 percent of the funding would come from state funds and the balance from a shared risk pool by participating lenders.
Another proposal was the launching of a Mortgage Hotline and Web site to provide tips to consumers on how to avoid foreclosures, as well as HSLP referrals to participating financial institutions, services that could be provided by the credit union industry exclusively or in coalition with one or more outside partners.
Adams notes that the mortgage crises may also serve to underscore the need for financial institution regulatory relief through safe and appropriate relaxation of regulation requirements to reduce the costs associated with loan defaults and foreclosures.
“We are following up in putting the coalition and the Home Saver Loan Program together,” he says. “But, when the rubber hits the road, the real key will be the decisions that individual credit unions make in taking risks and launching initiatives to make a real difference in people’s lives. This is the time for credit unions to think outside of the box while remaining true to their principles.
“The good news is that a lot is already being done by credit unions and other lenders for existing members and customers. Many people are being helped with loan modifications, consumer information and financial education. All credit unions need to make formal assistance plans a high priority for 2008 and 2009. The multiplier effect of 350 credit unions helping their 4.4 million members in Michigan can’t be overstated.”
Many Michigan credit unions already have numerous poignant stories to tell of extraordinary efforts in reaching out to help members in danger of losing their homes. One such is ELGA CU (FL).
“The latest one we have is a middle-aged couple who built their dream home in Birch Run, only to have the husband, who worked in the construction industry, lose his job,” says President/CEO Karen Church.Sympathetic to the plight of a long-time member in good standing, the ELGA Board of Directors agreed to refinance the mortgage at just 3.5 percent, a balloon note that will reset to market rates after giving the couple ample time to get back on their feet.
“We were going to look like the ‘bad guys,’ foreclosing on their home,” Church says. “Instead, we’re now the ‘good guys’ who helped them save it.” Church has numerous other similar stories to relate — a member who was able to save $35,000 when ELGA CU negotiated a buyout and refinance of a mortgage held by another lender; a thank-you note on her desk from a woman who was granted a short-term loan to get caught up on her mortgage payments while waiting for a much-needed income tax refund; a man who ran up $8,000 in personal expenses on a corporate credit card, putting both his job and home at risk.
That latter example might not seem like a worthy candidate for special assistance from the credit union, but Church says a meeting with the man and his wife revealed more than initially met the eye. “These situations aren’t always black and white and it’s important to hear the full story,” she says. “A bank probably wouldn’t do that, but a credit union should.
“I’m glad to hear the regulators saying, too, that they recognize the need for credit unions to think outside the box today and take calculated risks to help their members,” she adds. “We absolutely need to be doing that. Many of these situations involve the credit union taking on more risk, but we as credit unions should be willing to do that.
“There’s no surer way to build lifetime loyalty than to tell a member who has fallen on hard times that you have faith in him and trust that a loan will be repaid. These stories are what credit unions are all about.”
The MCUL will continue to support and assist with the formation and implementation of the Coalition, with individual credit unions participating in the process and providing input and all activities coordinated by an internal MCUL Mortgage Crisis Steering Committee, Adams says.
“For Michigan credit unions wishing to be a part of this whole effort, the obvious first step is to expand your plans and activities to help your existing members and identify ways to reach out to your communities,” he adds. “No credit union need wait for the MCUL or anyone else to present a formal program.”
Adams also asks that credit union CEOs and boards of directors determine what level of resources they may be able to allocate to the to the Home Saver Loan Program. “This unprecedented example of credit union, bank and state government cooperation represents a pioneering effort — something that has never been done before, certainly not recently or at this level,” he says.
“We can be proud of the fact that many credit unions are already helping their members with loan modifications in ways that other lenders wouldn’t ever consider. Not only are these special efforts good for members and credit unions, they’re good for Michigan’s economy, too, and are simply the right thing to do. Nobody is better suited to seize the moment and take advantage of this opportunity to help than well-capitalized, service-driven credit unions.”
When Will Home Sales Rebound?
The roots of the current housing slump can be traced back to 2005 when existing home sales began to fall in June of that year, according to the National Association of Realtors (NAR).
Following a quick spike in the first quarter of 2007, sales fell off by more than a million homes. Sales of new homes peaked in June 2005 before falling off by half by the end of 2007. Much of that drop-off can be traced back to the sub-prime crisis.
In 2007, Michigan home sales fell by 5 percent, with the sub-prime crisis having a direct role in the decline. There are 212,000 homes with sub-prime mortgages in Michigan, and a remarkable 22 percent of them are behind in their mortgage payments. Eleven percent are in foreclosure.
But the NAR holds that the numbers may not be as bad as they look and that the basis for a rebound in the housing market is already in place.
“There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase,” says NAR Chief Economist Lawrence Yun. “As a result, the exact timing and the strength of a home sales recovery is a bit uncertain. A meaningful recovery in existing-home sales could occur as early as this spring — or it may be further delayed toward late 2008.”
CUNA economist Steve Rick believes inventory will be a major factor in the market this year. “The 2003 to 2005 home sales pace was greater than long-term demand because of unusually low interest rates,” says Rick. “Expect nominal home prices to fall another 5 percent in 2008. It may take many years for housing market prices to reach inflation-adjusted highs.”
The wildcard in any possible rebound will be interest rates. After the Federal Reserve cut interest rates by 75 basis points in January, fixed-rate mortgage numbers dropped to their lowest in four years. In the first quarter of 2008, 30-year fixed-rate mortgages are three-quarters of a percent lower than January 2007.
ADDITIONAL RESOURCES
An audio file of the entire MCUL Mortgage Crisis on Jan. 10 and its accompanying PowerPoint presentation is available on the MCUL Web site. The Real Media file can be accessed at http://www.mcul.org/real_media/mortgage_crisis.ram and the PowerPoint at http://www.mcul.org/files/cucorp/744/file/Mortgage_Crisis_Summit.pdf.
LAFCU (LN) President/CEO Robin Frucci’s Jan. 29 testimony is available on the MCUL YouTube channel at http://www.youtube.com/user/MCUL6.
A brief clip of MCUL President/CEO David Adams testimony Dec. 4 before the Michigan House Banking and Financial Services Committee is available at http://www.youtube.com/watch?v=Q13PkYglbIg.
Viewing YouTube videos require the latest version of Adobe Flash, which can be downloaded for free by visiting http://www.adobe.com/shockwave/download/download.cgi?P1_Prod_Version=ShockwaveFlash. Additional technical assistance is available by contacting MCUL Public Affairs Director Mike Bridges at mjb@mcul.org or (800) 262-6285, Ext. 246.
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Regulatory Affairs
