It’s been years since the mortgage storm first hit portions of the nation’s housing market. The smoke has now cleared, and although the sun is not yet shining on all areas of the market, there are some positive trends. The New York Times in March touted an improving outlook following the biggest monthly increase of new home sales in 47 years. Existing home sales for that month were also up 16.1% from one year ago. The growth trend continued through April as warm weather and tax credits brought new buyer interest.
“We are starting to see some increase in activity,” says Ron Felder, senior vice president and chief credit officer at Patelco Credit Union ($3.6B, San Francisco, CA), one of the largest credit unions in one of the hardest-hit regions. According to Felder, referrals and application activity is improving monthly, not only because of the federal first-time homebuyer incentives but also because a similar California initiative required closing by May 1. As credit unions approach the summer — the peak home buying season — buyer confidence in the national market appears high, even without the push of federal incentives.
According to a poll conducted by life insurance and investment management expert Prudential Financial, Inc., although 90% of consumers thought the first-time homebuyer’s credit would help the recovering market, 65% of home shoppers said the legislation had “little or no” effect on their decision to buy. This is a sign of greater-than-expected stabilization.
“The biggest problem we’re facing right now is unemployment,” says Kim Yarnelli, vice president of real estate services at GTE Federal Credit Union ($1.5B, Tampa, Florida). Unemployment hovers around 12% in Florida and has exceeded 13% in California.
Like unemployment, delinquency remains a burden in the market but is leveling off in many of the country’s worst hit areas. For example, Patelco’s total delinquency leveled off in January and decreased from February to March. Its first mortgage delinquency did rise from approximately 6.17% in 4Q 2009 to 6.47% in 1Q2010, but the rate has ceased to rise as quickly as during the same period the year before, when its 1.42% delinquency rate doubled.
“Hopefully, we’ve seen the peak of that [delinquency],” Felder says.
As increased borrower interest helps stabilize housing markets, credit union mortgage modification strategies are also being adapted to meet the realities of member situations. Most credit unions now have a working plan in place to stem loss; tackling re-default in modified loans remains an important move to keep the momentum of the housing market flowing forward.
According to a release from makinghomesaffordable.gov, 155,173 trial modifications and 2,879 permanent modifications were cancelled in March because of re-default. This is almost twice the amount from the month before. This trend might be startling, but the flexibility of credit unions to modify according to their own standards, and go above and beyond the outlines of federal agencies, is helping them achieve modification success.
California’s re-default rate is far higher than the national average, says Felder. Patelco’s performance rate, on the other hand, has been consistent over the past 4 or 5 months, with approximately 70% of modified loan holders paying every month as agreed.
Last fall, the credit union revised its loan modification policy, implementing a three-tier “waterfall structure.” It first tries to qualify troubled borrowers under HAMP guidelines. If a borrower does not meet HAMP guidelines, then the credit union moves on to the California Foreclosure Prevention Act, which applies only to state residents. The final option is Patelco’s own modification model, which incorporates aspects of both programs and is intended for members whose mortgages were not sold to Fannie Mae.
“First, we attempt to extend and re-amortize the loan up to 40 years to achieve a lower DTI (Debt-to-Income) ratio,” Felder says. “If the reamortization isn’t sufficient, we look at reducing the interest rate to as low as 2% for up to three years to achieve the target ratio. Lastly, we look at a combination as a means of reducing the housing debt ratio.”
Approximately 90% of Patelco’s mortgage modifications fall into this category.
A two-year workout balloon with lowered interest rates has helped curtail re-defaults at GTE FCU and provides members with a long-term, sustainable monthly housing payment.
“We customize the program to what you can actually pay, making payments fit current needs,” Yarnelli says.
At the end of December 2009, GTE had a 17.3% redefault rate for its modified loans with about $6.2 million worth of loans non-performing. The re-default rate has since increased slightly to around 19% — worth approximately $7.1 million — at the end of April.
Despite the rise, Yarnelli has confidence in the balloon system. Re-default rates are still limited compared to the re-default seen in long term-federal programs or short term-modifications that end up increasing monthly payments.
“The intent [of HAMP] was good but it’s not working,” Yarnelli says.
The Office of the Comptroller of the Currency (OCC) provides mortgage metric rates that demonstrate the re-default risk of loans according to the modification’s change in payment amount. According to fourth quarter 2009 data, modifications that increased monthly payment amounts had a 68.5% likelihood of re-default within 12 months, compared to a 39.8% risk if payments were decreased 20% or more.
Steve Vansickler, vice president of lending for Visterra Credit Union ($371.3M, Moreno Valley, California), says credit unions should only resort to a short-term loan revision if the member’s financial hardship is temporary, as the resulting “payment shock” of payments increasing when the modification resets can trigger re-default.
As of May 31, Visterra has modified $4.5 million in first mortgages and $350,000 in second mortgages. Although these modifications are still in early phases, all are performing, says Vansickler.
Ultimately, there are some borrowers no credit union can help. Unemployed members who are unable to make payments of any amount represent a segment of long-term modification re-defaults. Resolution of such situations lies outside the credit union’s control.
“There are certain people we can’t help and some that can’t help themselves,” says Yarnelli. In these cases, lenders must move the property in a different direction to avoid the larger losses a failed modification could create.
According to the OCC mortgage metric report, the number of short sales at financial institutions for 4Q 2009 has increased 22.2% quarter to quarter to 37,584, a number twice as high as the 4Q 2008 levels.
GTE expects to “take a $100,000 haircut,” on one such sale, says Yarnelli. Yet under the correct circumstances, these losses save the credit union the cost of an average foreclosure (which is approximately $60,000 per home in carrying cost, maintenance, and related factors) and the cost to dispose of the property (which can run 20-25% of the loan amount).
“Short sales are preferable if the borrower’s agreeable,” says Felder.
Whether a short sale is the right option also depends on factors such as the timeframe, property evaluation, and the market. Complicated home-equity loans or houses with multiple liens can lengthen the short sale process and may deter some financial institutions from pursuing this option. Owning a high percentage of your loan portfolio and avoiding exotic, risky mortgages tends to reduce the effort required for a short sale and increases the incentive for both the borrower and the lender to make the sale.
In California, property values from 2008-2009 decreased nearly 34%. From 2009 to 2010 those values have increased approximately 4.6 %, stabilizing slightly, says Felder. According to the National Association of Realtors, home prices in the San Francisco Area have seen an astounding rebound of 29% since first quarter 2009.
As property values recover, short sales will likely have a less prominent place in many credit unions’ loss prevention strategy. “We might be less willing to do a short sale if properties’ values go up,” Felder says.
Net present value analysis presents opportunities at the beginning of modification requests to determine if the income generated by the modified loan represents the potential best course of action for minimizing a loss, says Felder.
By looking at the property’s current and projected value, credit unions can compare losses from a foreclosure to losses from a forbearance or modification. In some cases, foreclosure presents the most financially stable solution.
In 2007 charge-offs at GTE were at $2.4 million, mostly in junior liens. This year the credit union charged off $4.7 million, with the majority in junior liens and second mortgages. Only a small portion was in first mortgages.
GTE currently has five real estate-owned (REO) properties with more coming, says Yarnelli. Frequent foreclosures have “clogged up the pipeline” in Florida, leaving financial institutions waiting as long as 12 to 18 months to get a title. It is a rare, but this environment can potentially provide a new threat of loss through the actions of the borrower.
“Consumers are more savvy than in the past,” says Yarnelli. Some homeowners are asking why they should take a deed in lieu of foreclosure when they could force the credit union to foreclose on the home in an attempt to stay and not pay.
Patelco currently has 12 REO properties on its books; this number, Felder says, has increased over the past six months. Waiting time for a title in California is approximately six months, but that can’t deter lenders when a foreclosure is the best option.
“If the value is there, we continue to pursue foreclosure,” says Felder. “We attempt to work with the member and probe for reasons why a short sale or D.I.L. [deed in lieu of foreclosure] is not acceptable, recognizing that a member who is trying to stay in the home without payment during foreclosure will not admit it.”
Both GTE and Patelco offer cash for keys and other incentives to facilitate a timely and cost-effective resolution, and collateral damage has not been a major factor with their foreclosed properties. This helps the credit unions quickly turn around the property with minimal up-keep.
“Some are in move in condition,” says Yarnelli of the properties GTE has foreclosed on in the past.
There is a growing market for distressed properties.According to the National Association of Realtors, 35% of sales in February and March consisted of distressed properties. When credit unions maintain effective realtor relationships and marketing campaigns, these properties can be moved affordably and quickly without high cost of ownership.
Yarnelli says the current low interest rates and property price cuts are driving new population segments, such as 30-something professional first-time home buyers, to home ownership.
With refined modification options available and a realistic assessment of short sale and foreclosure environments, credit unions can stem loss effectively, staying afloat until stability returns the market to a more profitable level.