The House That Trash Built

Niche mortgages are becoming more common, but finding appropriate financing still causes headache and heartache.

 
 

Last week, The Wall Street Journal ran a front-page article describing the difficulties the three little pigs might have in securing financing in today’s market, but even the pigs might have thought twice before building a house of trash.

Colorado couple Jon and Laura Hagar obtained a seven-year balloon in 2007 from Red Rocks Credit Union to cover the costs of constructing an eco-friendly home made of tires, plugged with refuse, and covered with concrete, clay, and stucco. Times were good then and the Hagars are exemplary borrowers on paper.

Then the housing market collapsed.

Now the Hagars can’t find a lender to offer a conventional loan of $240,000 on a 2,700-square-foot home that has appraised at more than $600,000.It’s a tough market, and it’s even tougher for borrowers with unique properties.  Red Rocks has been shopping the mortgage to outside investors, but none are biting. They are declining the loan because it is an “unacceptable property” and an “untested market,” says Bill Schimel, a loan officer at the credit union.

Still, according to Don Arkell, a vice president at Red Rocks, there is opportunity for credit unions in such loans. In fact, if any financial institution could make such a loan, it would be a credit union.

“Only a credit union would take care of her [Laura Hagar],” Arkell says.

Arkell supports the thinking behind exploring loans with a green bent, but says credit unions must go into such loans with their eyes wide open. He even offers the following best practices:

  • Put together a program so you can make loans on unique properties with intent.
  • If the credit union is comfortable taking on riskier loans, such as business lending or land loans, then it might want to embrace the opportunity to grow its real estate portfolio with unique properties.
  • Look at the land value and stay short. If the borrowers default, the credit union needs to be able to remove the house from the equation and still come out ahead of the loan.
  • Consider the collateral risk. Consider the liquidity risk. Then account for that increased risk in the interest rate. A unique property + no market = higher interest rates.
  • Understand what is involved in making the loan and be able to explain that to the borrower. Even with great credit, cash on hand, and a stellar loan-to-value, borrowers need to understand unusual collateral (such as a house made of 17,000 old tires) will not adhere to the standards of a conventional loan.

Although it likely won’t be able to put the Hagars in a 15-year fixed rate mortgage at a conforming rate, Red Rocks is bent on taking care of its members.

“It’s a good loan,” Ardell says.

“They are good borrowers,” Schimel agrees. “The issue is collateral.”

 

 

 

March 22, 2010


Comments

 
 
 
  • The credit union may be on the hook for this home for decades. If this borrower defaults, the credit union will have to finance the new owner because they won't be able to get financed anywhere else. If the member wants to sell it, the credit union may have to finance the new owner for the same reason. The only way out is for the borrower to pay it off or for someone to buy it for cash.
    Anonymous
     
     
     
  • Unfortunately, Comment #1 is all too true, Conforming conventional mortgages are just that, very conforming to a closely defined set of rules. In light of current mortgage industry troubles, it isn't too surprising that nobody will step out and take a seemingly moderate risk with a residence that is constructed in an unconventional manner. Most lenders have given up on requests for geodesic domes, rammed earth and straw bale homes, not to mention a home made of recycled tires. Today, credit unions are almost alone in the position to be able to help their members with a desire for an unusual home. As long as they are prudent and acknowledge that this type of mortgage will be in their portfolio indefinitely, they have the ability to make a genuine difference. Great job, Red Rocks Credit Union!
    John Davies