Boom expected in second-home lending, credit unions urged to leverage trend

NEW YORK – In advertising and public relations, it’s called the FUD motivator – fear, uncertainty and doubt. Shortly before the events of September 11, Peter Francese, founder of American Demographics magazine, wrote an article predicting a coming boom in second-home ownership. That surge, he indicated, will be driven by three trends: shrinking families, aging and more affluent households, and new ways of working from remote locations. The bottom line, he stated: “Americans may purchase 3.6 million second homes during this decade (that’s almost 1,000 a day). This would bring the number of households that have second homes to 10 million by 2010, from 6 million today.” Now Francese has added another factor. Concern about terrorism, he told Credit Union Times, will prompt more people to seek what they consider a haven beyond possible high-profile targets in major cities. This means a couple things to lenders such as credit unions, Francese said. “You’re going to have more members coming in who will want a mortgage on a second home. Also, as demand for second homes goes up, prices are likely to go up as well,” he indicated. “What’s going to be a little tricky is if the price of second homes in some areas gets out of line with the actual value, you’re making a loan on a property that doesn’t really have much underlying value. It isn’t so much that demand will get out of hand, it’s that the greed of the people selling second homes gets out of hand. The `greater fool’ theory comes into play, where developers say, `All I want for this is $500,000. It sold last week for $300,000 and it’ll sell for $700,000 tomorrow.’ “You may have to do some due diligence on the person who’s making the loan. One question to ask is, `Do you own any other property besides your first home?’ If the answer is, `Oh, yes, we’ve got a place here and a place there,’ an eyebrow should go up.” There is a danger, especially with the fear factor in place, that people will over-extend themselves to buy a second home at an inflated price. On the other hand, Francese added, you don’t want to miss out on what he expects is going to be a pretty big phenomenon in the next 10 to 15 years. Looking at demographics, his passion, Francese identified members 55 to 64 years old as prime second-home buyers, with the average age of a second-home buyer probably 58. Actually, he added, almost any member over age 50 is a good prospect for second-home ownership. It’s quite common for a person who gets within 10 years of retirement to look for a place to use as a vacation home now and a primary home after retirement. “Let your members who are 50 and older know you make second-home mortgages,” he advised. Francese suggested credit unions enjoy some advantages in this second-home market. He pointed out he and his wife have been credit union members for years, and he sees credit union members as sensible, savvy people who aren’t prone to run out and overextend themselves. He believes credit unions enjoy another edge. When people buy second homes, those homes are often hundreds of miles away from where they live and their credit union is located. For example, a credit union in Florida may know nothing about ski resort property in Colorado. One way to overcome this is to create alliances with other credit unions. The Florida credit union can phone a credit union in Colorado to ask about property values in the ski resort the member is eyeing, and perhaps get a recommendation for an appraiser in the area. Karen Christian, vp of lending at State Employees Credit Union of Maryland in Linthicum, noted, “We do include that (second-home mortgages) in our advertising. I wouldn’t say it’s made a huge impact on our business. We’re near the beach, in an area where there is a lot of vacation property. “We don’t want to do strictly investment properties. So we have to ensure the owner is in the property at least two weeks out of the year.” She adds SECUM also sees members using some home equity loans to purchase second homes. Appraisal requirements are tougher for a mortgage on a second home. On a primary home, the credit union may simply run a database appraisal. A second home calls for at least a drive-by, and ideally a walkthrough. SECUM has several appraisal companies it can tap in various areas. Sussex County Federal Credit Union, Seaford, Del., writes very few mortgages on second homes. Most vacation home loans come through as home equity loans on a primary home, explained Richard Stoops, SCFCU manager. “When you’re building a second home, the amount involved isn’t as much as your first home,” Stoops said. “We have a 7-year and a 15-year home equity loan, and members like that shorter period of time. We don’t look at it any differently than any other home equity loan.” Like many other credit unions, USA Federal Credit Union, Troy, Mich., doesn’t write mortgages on rental properties. But Jim Reinhart, vp/member services, notes there is actually a way to help a member who perhaps wants to build a second home, rent it, then move in at retirement time. USAFCU’s mortgage activity is handled by Lincoln Service Corp, Owensboro, Ky. The credit union can refer the member to Lincoln Service. In turn, Lincoln Service can locate a financing source willing to handle the loan. – [email protected]