RANCHO CUCAMONGA, Calif. — Although credit unions originated very few subprime mortgage loans comparatively with other mortgage lenders, the non-profits might still take an indirect hit as a result of the mortgage industry's woes.
Terrin Mendivil, economist and industry analyst for the California Credit Union League, said credit unions may experience home equity loan losses if the member's first mortgage, financed elsewhere, goes into foreclosure.
"How many credit unions have that exposure? It's uncertain, because the problem could arise from a subprime loan, or just an adjustable rate that the homeowner isn't prepared for," Mendivil said. "Or, say the credit union is holding the second, a HELOC, and the homeowner pulled out all the equity, then experienced a drop in value. Credit unions holding seconds could face many issues, often depending upon the quality of the first."
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Mendivil said the potential for loss is difficult to quantify in the industry, because so many members have first mortgages financed elsewhere.
While California receives the most press regarding the current state of the real estate market, Michigan has plenty of problems of its own. In fact, foreclosure rates in Detroit are so bad, the city is home to four of the 10 worst zip codes in the country, according to industry statisticians RealtyTrac.
Dave Toepp, president of Mortgage Center, a Michigan CUSO that counts 75 of the state's credit unions among its clients, said subprime products aren't to blame for most of the state's foreclosure woes. Instead, unemployment, the result of a struggling automotive industry, is driving people from the area.
Toepp said he doesn't anticipate his member credit unions will experience too many foreclosures due to poor products, but they will be forced to deal with foreclosure issues just the same.
Although credit unions are supposed to review the quality of first mortgages when approving seconds, the mortgage pro said he suspects credit unions nationwide might be surprised at how many seconds slipped through their loan departments on the backs of subprime first mortgages.
"Loan to value has always been a critical element of underwriting," Toepp said. "I'd imagine plenty of credit unions didn't stop to think, 'do we want to be behind a loan that's going up?' At the time, nobody was really thinking that way, although they should have been. Credit unions might receive an unpleasant surprise at foreclosure time, and not just that, the balance on the first might be higher than anticipated. It's an ugly thought."
Toepp said in the rush to meet member demand during the mortgage boom, some credit union employees may have overlooked evaluating the quality of the first mortgage when approving a second, or may not have been as discriminating as necessary when approving the refinance of a first held elsewhere.
"That's what always happens with these things, everybody suddenly gains wisdom with the gift of hindsight," Toepp said. "And the pendulum swings so far in each direction. The people who are complaining about subprime lending today were the same people who, ten years ago, were complaining that lenders had created too many barriers to homeownership."
Mendivil agreed that credit unions might be surprised at how many of their second mortgage loans are tied to a subprime first. Not only that, but the league economist said she's heard that California state regulators will ask their auditors to take a closer look at the issue.
Calls to the California DFI regarding the issue were not returned as of press time.
As rising mortgage payments create cash flow pressures for homeowners, payments on consumer loans may become delinquent. Both Mendivil and Toepp agree that members will continue to make payments on auto loans first, because cars can be repossessed, and members need their cars to commute to work. Additionally, some states have such long foreclosure processes, oftentimes borrowers will go against conventional wisdom and allow their mortgages to go delinquent while paying other loans, hoping that they'll find a financial solution before the foreclosure process is complete.
"I think as members encounter these difficulties, they will probably come to their credit union asking for help, whether it's to refinance their mortgage, or for credit cards or other loans to help them make ends meet," Mendivil said.
"I wouldn't be surprised if credit unions were asked to help these individuals more in the future. It's going to be hard for credit unions to balance risk with helping members, though. I foresee credit unions suffering more losses in their loan portfolios than usual, thanks to subprime mortgages financed by other lenders. They might also face riskier loan requests than before," she added.
Mendivil pointed to her Leagues' WestScan Report, released last month, which revealed a significant increase in reserves held by Nevada credit unions, assumed to be in anticipation of loan losses.
"We didn't see as much of that in California, but we do believe our credit unions are prepared to help members who face financial problems," she said.
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