Data released last week by RealtyTrac reported that foreclosure filings across the U.S. rose 36 percent in August compared to July and 115 percent versus August 2006. The data is based on default and auction sales notices as well as bank repossessions. A significant contributor to the jump in filings was a rise in the number of bank repossession filings during the month. As rates on many adjustable rate loans begin to reset, consumers are facing difficulties making payments and banks are taking steps toward foreclosure.
Foreclosed real estate remains a very small portion of the credit union balance sheet. The $216.3 million reported in this category at midyear represents just three basis points of total credit union assets. However, credit unions are seeing higher balances in this category as the real estate market slows. At June 2006, credit unions reported $136.9 million in foreclosed real estate assets.
RealtyTrac’s CEO pointed to payment adjustments on subprime loans as a factor in the increased foreclosure filings. While credit unions do not have the exposure to these loans that other lenders have, the impact of rising rates and the real estate slowdown will still have an effect on credit unions. Midyear data shows that real estate loan delinquency at credit unions has risen to 0.44 percent from 0.26 percent in June 2006. This rate remains well below banks’ 1.01 percent rate on nonperforming real estate loans but also indicates that credit unions are not immune to the slowdown. In addition, the states with the highest foreclosure activity – California, Florida and Ohio – have a significant credit union presence.
A number of credit unions have not had to become involved in the foreclosure process in the past. At the time of the last significant real estate slump in the early ‘90s, real estate lending was a smaller part of credit union activity. While just 775 credit unions report foreclosed real estate assets on their books, the number has risen by 120 credit unions over the past year.
Part of the reason for the low foreclosure activity is that, given their relationship with members, credit unions are less likely to move quickly into the foreclosure process if a member is falling behind on their monthly payments. They are more likely to work with the member to refinance or adjust their payment schedule if it will allow them to continue to make payments. Credit unions will need to continue to look to these steps first, but must also must be prepared to initiate foreclosure proceedings if warranted by the situation. The judgment for determining which path is appropriate at what time will be a key issue for many credit unions.
To learn more about how credit unions are handling situations when members face difficulties with real estate loan payments, join us for the webinar Foreclosure: Balancing Member and Credit Union Interests