Hedging Your Bets Against a Real Estate Bubble

The mortgage lending industry is aware of a possible real estate bubble. Learn how Vista FCU, Kern Schools FCU and Stanford FCU are reacting.


House prices nationally are up 12.5% in the 12 months ending March 31, 2005, according to the Office of Federal Housing Enterprise Oversight, which administers the House Price Index. Several credit union lending executives have noted that the housing demand exceeds supply in their area, so are careful about what mortgages they promote and the guidelines they set for each product. Below are a few examples that illustrate this phenomenon:

Vista Federal Credit Union (CA and FL, $434 million in assets)

“We have a real housing shortage in the Central Florida area,” said Mark Rodriguez, real estate loan manager. “It is common to see a builder’s announcement that a new community will be started.” Potential buyers pay a $2500 deposit to reserve a priority spot in line to live in the new community. This entitles them to make a quick decision on whether they want to purchase a specific lot after viewing maps and designs for what the community will look like.

“People are actually doing it,” said Rodriguez. Vista FCU accepts the member’s mortgage application upfront, but may wait for several months until the house is completed before moving forward with the process until the home nears completion.

Lending executives at Vista FCU are more concerned about home equity lending practices, as they require less documentation. As a result, Vista created a tiered credit score approach that allows members to take out a certain percentage of their equity. For example, members with a credit score over 640 can withdraw up to 100% CLTV while members with a credit score of 600 are limited to 80%.

Kern Schools Federal Credit Union (CA, $1.4 billion in assets)

Kern Schools FCU is located in Bakersfield, CA, which documented a 33.7% annual house appreciation rate and qualified as the fastest appreciating city in the country according to the Office of Federal Housing Enterprise Oversight. The credit union just recently began offering investor mortgage loans.

“The underwriting requirements are stricter than for primary residence mortgages and the credit union requires at least 20% down for these deals,” said Randy Petersen, vice president of loan administration. “We normally will do up to 100% financing for primary residences.”

With the affordability index declining, Kern Schools FCU is focusing on how its members can achieve home ownership. The credit union recently began offering the 40-year mortgage, which is now a conforming secondary market product through Fannie Mae, and has competitive rates on its hybrid ARM products. It also made available to its members financial education and counseling to help them qualify for financing and be better money managers.

Stanford Federal Credit Union (CA, $634 million in assets)

“This is the greatest acceleration of housing prices that we’ve ever witnessed in California,” said Brian Thorton, vice president of real estate/business lending. Stanford FCU’s strategy is to ensure that all mortgages are conforming and are able to be sold to the secondary market. “We do not retain anything over 80% LTV,” said Thorton.

Thorton recommends that if credit unions offer interest-only adjustable rate mortgages, they should make the interest-only portion at least five years. “The borrowers will have more immediate payment shock if rates continue to climb,” he said.




July 18, 2005



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