There was a time when first-time homebuyers were coming out of the woodwork, offering credit unions a rich source of first mortgages.
“That’s simply not the case anymore,” says Lloyd Hamm, chief executive of Grafton Suburban Credit Union ($120M, North Grafton, MA).
The reasons for this dearth of first-time buyers are varied. Recent college graduates, who traditionally accounted for most first-time buyers, entered a weak job market while carrying record high student loan debt that has tripled since 2004. In addition, many young adults lack the credit history needed for a mortgage. According to a 2012 FICO study, 16% of adults age 18 to 29 had no credit cards, up from 9% in 2005.
That environment, however, doesn’t deter Hamm and his mortgage-lending team at Grafton. Instead, he sees opportunity in the form of a recovering economy and a steady stream of college graduates. This year, universities will churn out 3.6 million graduates, including those with advanced degrees, according to the National Center for Education Statistics.
Nevertheless, challenges persist for credit unions entering the first mortgage market. Cooperatives made $13.7 billion fewer loan originations in the first quarter of this year than in 2013. That’s why Hamm has a plan that involves the Federal Home Loan Bank of Boston, a financial institution for cooperatives and banks who become members. The bank provides grants for eligible homebuyers, helping them qualify for first mortgages through an FHLB-approved financial institution.
Help From A Financial Institution’s Bank
When Hamm first started at the credit union 13 months ago, Grafton already had a line of credit with FHLB, though it used only a tiny portion of it. That’s how the credit union learned about the $2.7 million pool of grants, which the bank offers through its Equity Builder Program to 125 banks and cooperatives in New England. The money can be used to help borrowers with down payments, closing costs, homebuyer counseling, or rehabilitation assistance. Through the program, Grafton can access up to $150,000 annually, though it must re-apply every year, with each grant limited to $15,000 per homeowner.
For first-time homebuyers, however, that potential $15,000 could be a boon. Consequently, Grafton hopes to expand its presence as a mortgage lender in the community by targeting first-time buyers with the grants offered through FHLB’s program. In this way, the credit union believes it can increase its portfolio of first mortgage loans.
Grafton’s 1.85% first mortgage loan penetration trails that of asset-based and state peers at 2.13% and 2.71%, according to March 31st data from Callahan & Associates Analytics. Grafton, however, also competes for a piece of the mortgage pie in an area where the average household income was just north of $70,000 in 2011, according to City-Data.com. Consequently, Grafton outperforms comparable credit unions with a higher than average loan balance of $20,733, compared with $11,413 and $17,886 for asset-based and state peers. At $15,832, Grafton’s average member relationship, which is an indication of the membership’s willingness to borrow from an institution, also exceeds both peer groups.
A Lean Pool Of Applicants
Currently the credit union is looking for its first applicants for the program, but FHLB’s criteria makes eligible borrowers that fall into the credit union’s field of membership hard to find.
“The criteria is not as cut and dried as one would think,” says Doug Lanzillo, assistant vice president of real estate lending.
Both the credit union and FHLB require that applicants to the equity builder program have a minimum credit score of 640 to qualify for 10% in down payment assistance, and 680 for 5%. For income, however, the FHLB’s requirements are lower than what the average Grafton community member makes. Under FHLB, a household with four individuals over the age of 18 qualifies for assistance if it has a total income of $63,000 or less; for a single-person household, the limit is $43,000. Many of Grafton’s first-time buyers have incomes that exceed those limits in part because they live in an area with a high cost of living.
As a result, it’s a catch 22. Applicants with incomes low enough to qualify generally can’t afford the prices of homes in Grafton’s community, where the cost of living is higher than average, while members who can afford a home exceed FHLB’s income standard. Of 12 applications so far, the credit union was able to approve only one, and that member is still looking for a house. FHLB wants the assistance to go to households that wouldn’t otherwise be able to own a home, Lanzillo says.
“It’s like trying to get three arrows to hit in mid-air,” Hamm says. “The person has to find a home in which they can qualify, they have to have low enough income, and at the same time be able to cover enough of the down payment for whatever it is in this market.”
Although Grafton expects to use its $150,000 FHLB funds, it will have to work harder than most institutions to do so. Those challenges are not unlike those other credit unions face in the first mortgage marketplace. Although the demand for those loans exists, many members either have too much debt to be a sound risk or not enough cash for the down payment.
One way Grafton hopes to find eligible members is through home-buying seminars and community events, where it can spread the word about the grant program. The credit union also understands that finding first mortgages is a long-term endeavor.
With that in mind, Hamm cautions, “Be prepared to do the hard work in finding qualifying good candidates for the program. Don’t assume that just because you have free money the world will beat a path to your door.”