"It's A Wonderful Life" – the 1946 movie produced and directed by Frank Capra – still has it right. Any credit union CEO who does not get a kick in their principles when hearing George Bailey's passionate soliloquy to Mr. Potter about the virtue of home ownership clearly is in the wrong industry.
Consider the following: "…But he did help a few people get out of your slums, Mr. Potter. And what's wrong with that? Why…Here, you're all businessmen here. Doesn't it make them better citizens? Doesn't it make them better customers? You…you said…What'd you say just a minute ago?… They had to wait and save their money before they even ought to think of a decent home. Wait! Wait for what? Until their children grow up and leave them? Until they're so old and broken-down that they … Do you know how long it takes a working man to save five thousand dollars?
"Just remember this, Mr. Potter, that this rabble you're talking about…they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath? Anyway, my father didn't think so. People were human beings to him, but to you, a warped frustrated old man, they're cattle. Well, in my book he died a much richer man than you'll ever be!"
With Congress handing the credit union industry a gold-plated opportunity to help "the rabble" achieve a couple of decent rooms and a bath, it is a shame that the industry is standing flat-footed on this unbelievable, once in-a-lifetime opportunity to make real members.
Congress is forcing a fee for Freddie and Fannie loans which is a tax to use the secondary market. Basically, what Congress is saying is that home lending should be a local matter. There is a continuing debate over locally owned mortgagees which are kept in local portfolios and securitized mortgages. This debate will not be settled here. Both should be used; both have strengths and weaknesses.
The traditional 30-year mortgage has caused more economic damage than any good it may have caused. This is because a 30-year fixed loan borrower takes actions in their best interest and not the interest of the lending institution. They remortgage when rates are falling and they hold when rates are rising.
The next economic catastrophe will come when people and institutions holding the newly minted 4%, 30-year fixed loans go underwater when inflation kicks in and the bonds lose value. Prior to the 1970s, mortgage amortization tables for Realtors stopped at 6% because we never had rates that high. Then we got double digit rates in the late 70s and early 80s.
The only thing that is saving people from really taking advantage of these really low rates is the very high down payment requirement. If the average home is somewhere around $150,000, it would take a $30,000 down payment. It is suggested that saving this amount would take about the same amount of time as for a working man today as it did the time of the movie "It's a Wonderful Life" was made.
In many communities, the HOME lending business has collapsed. I say HOME lending because the 2008 housing collapse was due to institutions investing in housing and not HOMES. HOMES are where working people do their living and dying. Housing has nothing to do with living and dying.
Housing has everything to do with investing. We need to understand this difference. Had we stuck to lending for primary residences – that is, HOMES – we would never have experienced the ravages of the greed cause by improper investing in housing.
Credit union leaders have to get their heads back in the game. They need to understand that the secondary market was a risk-sharing tool that was misused. There are great reasons for a secondary market, but there are great problems, just as there are for portfolio lending.
One problem is that the Potters are the only people who can qualify for a loan. Credit unions are designed to be an alternative and it is high time that they started to act like one.
I developed and support the concept that proper mortgage lending to members for primary residences should be adjustable and tied to the cost of funds of an individual credit union. If you have the 20% down payment for loan, you may not need a credit union? Credit unions of course would be ill-advised to make and hold 30 year fixed mortgages at these rates.
So what are you going to do? Are you going to let your communities become renter societies where the Potters do all the buying, or are you going to get out there and get your members into HOMES?
Frank Capra understood something fundamental to building a strong community and by extension a strong America. It is to help people become stakeholders in the future. You do this by ownership of property. The ownership of a home is still the most important wealth-building tool for a family. Renting only helps the Potters.
Credit unions need to have George's father's passion for helping people obtain the "American Dream". This dream is still a HOME. It is not a McMansion or some other type of value trap. My mother still lives in the 1,500-square-foot home where my parents raised four children and will not leave because it is her HOME!
Creative credit union leaders should create alternative mortgage instruments that are adjustable and tied to cost of funds, or any other type of balloon product that will help people get into a reasonable home prior to them making their final real estate purchase.
Any type of reasonable balloon mortgage that fits your ALM needs can also work. If you use practical underwriting standards your institutions will grow and flourish. This does not mean that you cannot offer a competitive secondary market product! You would not build a house with one tool, so why would you think that only have one tool for financing is a good idea?
Congress has opened the door. You just have to walk through it. You are at a tipping point. You should not let fear paralyze you. The Potters are not afraid. They are buying! Don't miss this opportunity.
Bill Brooks is a former credit union CEO who now operates private client wealth management and credit union consulting businesses in Rehoboth Beach, Del.
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