Real estate lending is the largest component of the credit union loan portfolio. As of June, real estate loans outstanding at all credit unions totaled nearly $300 billion, continuing to be a major factor driving growth in the credit union loan portfolio. Credit union real estate lending grew 13.2% from the previous June to mark the fourth consecutive quarter of double digit loan growth. So, what is driving this consistent and impressive real estate loan growth at credit unions?
As the external market continues to deal with the fallout of the subprime crisis, credit unions remain strong. Many large banks have tightened their lending standards and some have exited the market altogether. This has happened at a time when many mortgage brokerages are going under due to the number of defaulted subprime loans on their books. For a large number of individuals seeking a real estate loan, credit unions have become the safest and most secure option for financing.
Responding to a Community's Housing Needs
Perhaps hardest hit by the fallout of the subprime crisis are first-time homebuyers. For these individuals, many of whom are low-to moderate income, finding a financial institution that offers the mortgage products they need and is willing to take a chance on them can be a very difficult task. One credit union that is taking great steps to help these first-timers purchase a home is Wright-Patt Credit Union ($1.4B in Fairborn, OH).
Wright-Patt views getting their members into a home as one of the key services that that the credit union can provide. For Tim Mislansky, Senior Vice President at Wright-Patt, home ownership is a significant component of the credit union’s mission statement to "help members through life." They feel that this initial home loan is a product that fosters long-term relationships with the credit union, building loyalty through this initial offering.
One of the reasons that Wright-Patt is so devoted to providing services to first-time home buyers stems from the housing market conditions they deal with daily in Montgomery County, OH, where they are located. Home sales in Dayton, OH have fallen by more than 20% from the prior year, a clear sign that the community is still feeling the effects of issues in the mortgage market. Additionally, Montgomery County is one of the top 50 counties in the U.S. in terms of the size of its African American population. Nationally, less than 50% of African Americans are homeowners, which is this case in Montgomery County as well. This means that a significant portion of the residents of Wright-Patt’s community are not homeowners, something the credit union would like to have a hand in correcting.
Financial Education is Key
The key to Wright-Patt’s FTHB (First-time Home Buyer) Program is the fact that the program incorporates many steps and solutions to assist the average FTHB. The first step that Wright-Patt focuses on is fostering financial literacy. They believe that education is an important component of understanding the home-buying process. To make sure their members are armed with the knowledge they need, the credit union offers free seminars partnership with local housing non-profits. The credit union also works with their mortgage CUSO, myCUmortgage, which partners with more than 50 other credit unions to help them help their members with home ownership through an outsourced mortgage processing solution. These educational seminars are not simply beneficial for the members' minds, but their wallets as well. If a member completes the full series of seminars, they receive a voucher for a discount on their closing costs. Wright-Patt's website also plays a key role in education by providing members with online applications, access to educational materials, loan calculators, and online pre-qualification for the mortgage process.
Developing a Suite of Mortgage Products
Equally as important as financial education, are the actual loan products themselves. Prior to the subprime meltdown and ensuing market changes, Wright-Patt offered members six distinct loans that targeted first-time home buyers. These loans offered many of the features, such as low down payments, that first-time home buyers are looking for in a lending product. However, as the secondary market and PMI providers have tightened their lending standards, these products have essentially dried up. Wright-Patt is striving to add products back in and use its balance sheet to help first-time home buyers without undue risk to the credit union.
Perhaps the most unique of these offerings was Wright-Patt’s "My Community Mortgage". This loan product was available only to those individuals that have a household income below the area median or live in areas designated low income by the Department of Housing and Urban Development. For Wright-Patt this was a large component of the community, as in 2008 80% of first time home buyers were either at or below the area’s median income.
The "My Community Mortgage" product was designed to help these individuals who might have had difficulty in the past affording a home under a more traditional product. By offering a product with no down payment, the ability to borrow up to 100% of the purchase price, and more flexible underwriting standards, Wright-Patt was able to get more of their members into homes, advancing fulfillment of their mission statement. Enhancing these benefits, this loan product also required lower PMI coverage than traditional loans, saving borrowers money each month, and was set at a 30-year fixed rate to help member avoid market fluctuation.
Recognizing that not all members looking to purchase their first home fall into the low income category, Wright-Patt also developed the "Wright-Patt First Time Home Buyer Loan" with features similar to the "My Community Mortgage". Members were eligible for this loan if they had not owned a home within the past three years. The loan required only a 1% down payment as members could borrow 90% of the purchase price on a first mortgage, and the additional 9% on a second mortgage. This loan amortized over 30-years, and was set at a fixed rate for the first five years; however after the fifth year the rate became variable, adjusting annually.
These tailored products and services played a major role in helping members in Wright-Patt's community purchase their first home. Coupled with other resources, such as CU Realty where participating realtors give 20% of their commission back to the homebuyer, these loans helped Wright-Patt build member loyalty while saving their members money and putting them in their first home. Currently, 65% of purchase money mortgages at the credit union went to first time homebuyers, a clear sign that this was a market in need of a service. This was a happy ending that many would not have been able to accomplish without the assistance of the credit union. As market changes continue to play out, Wright-Patt remains committed to the welfare of their members and the surrounding community. The credit union continues to work with PMI providers looking for solutions that can to return these product offerings to their previous LTV levels so that the credit union can once again offer these loans to members in need.