The Intensely Local Competitive Advantage

Desert Schools FCU manages foreclosures and competes at the extreme end of the real estate value chain.


On a recent visit to Phoenix, half a dozen credit union managers toured one of the city’s suburbs, Maricopa, to see firsthand the housing crisis. Karen Smith, asset disposition manager for Desert Schools Federal Credit Union ($2.9B, Phoenix, AZ), and Mike Collum, a local real estate broker, led the tour.

The Phoenix Valley area has been at the center of the housing crisis. Foreclosures in 2010 hit 49,808, up from 47,992 in 2009. However, pre-foreclosures in December were at their lowest level since March of 2008, indicating the crisis peaked early last year. Moreover, in a January Economist article Phoenix was listed as the second fastest growing area for positive employment gains since December of 2010; only Washington, DC, grew faster.

Maricopa County has the largest population of any county in Arizona. The marketplace holds $70 billion in deposits and is served by approximately 100 banks and credit unions. As of June 30, 2010, Desert Schools held a 3.8% deposit market share. Only three institutions, Wells Fargo, JP Morgan Chase, and Bank of America held a higher market share.

What We Saw in Arizona
The group visited seven homes, all lender-owned properties. Listed prices ranged from a low of $46,000 to a high of $119,000.  Most of the homes were built during the construction boom of the past decade and were now listed at 35-40% of their peak value. Many of the homes’ current listing prices were less than the cost of building the same home today.

These homes were all part of builder development track. The play areas, common grounds, and boulevards were in immaculate condition. Although there were four or five For Sale signs in a four-to-five block area, the remaining homes looked lived. Basketball hoops hung in driveways and trash bins aligned the curbs for pickup. The neighborhoods were not depressed; the homes were in excellent condition.

Desert Schools owned one property we saw. Listed at $71,500, the 1,266-square-foot single-level home had three bedrooms, two bathrooms, and was built in 2003. The house was in move-in condition, with new carpet and a clean two-car garage. The lights, heat, and water were turned on and all appliances were in place and working.

 The house was located on a golf course subdivision that included biking and walking paths. Yearly real estate taxes totaled $1,035; the quarterly home owner association assessment was $173. The property had been listed for 51 days. Our tour guide, Mike Collum, had hosted an open house the previous weekend.

Desert Schools’ Approach to Foreclosure Management
In 2010, 151 properties entered Desert Schools’ inventory, and the credit union closed escrow on 100. Its current inventory includes 76 single family homes with 27 in the initial intake and repair process. This is a small percentage of Phoenix Valley’s total foreclosures, most of which are owned by Fannie/Freddie and the major national banks. Countrywide, now Bank of America, was a major lender during the boom.

Karen Smith is a veteran lender and real estate broker in the Phoenix area. She was a lender during the 1980s savings and loan crisis. Then she worked for the Resolution Trust Corporation, which was owned by the federal government, managing and selling properties acquired from failed thrifts in Arizona and Texas.

Desert Schools hired Smith two years ago to create a competitive, efficient, member-centric foreclosure management program. Her duties include working with members to create the best possible solution for their situation. Once foreclosure is necessary, the credit union evaluates the property and prepares it for sale. The credit union’s goal is to sell homes within 60 days.

To do this the credit union evaluates what property improvements to make and works closely with local realtors to ensure they receive their full commission and understand the credit union’s financing flexibility. The credit union also regularly inspects and maintains the properties.

In contrast, none of the other lender-owned homes on the credit union manager tour was in move-in condition. Most had been on the market longer than 60 days and in some cases had been stripped of appliances, home speaker systems, and cabinets. The lights, water, and heat were not turned on in these other properties. Only recently had one of the other lenders emulated Desert Schools and started to fix up the properties for prospective buyers.

Collum was enthusiastic about Desert Schools’ commitment to the community. He said the credit union treated borrowers like members, working with them as long as necessary. According to Collum, Desert Schools’ property management is second to none. And despite stories of consumers walking away from home loans or taking advantage of moratoriums, Smith says she’d describe fewer than 5% of foreclosures as “difficult.”   

The Intensely Local Credit Union Advantage
With assets topping $2.9 billion at year end, Desert Schools is the largest locally owned financial institution in Arizona. It holds approximately 4% of the market share of insured deposits in the Phoenix metro area and serves more than 360,000 members. It is relatively small compared to the larger banks in the marketplace, but its local presence, knowledge, and focus makes it a leader in the real estate market – even in the most difficult extremes. The credit union runs ads on a local morning television show promoting its loan initiatives and 401(k) rollover options.

The credit union is investing in its market and its positive reputation in the community is growing even during adversity.  That investment is paying off. In an email update regarding the property the managers saw, Smith says, “We received a cash offer two days after the tour, put it into escrow and it closed and recorded today.”  

Operating at the grassroots of the economy with an intensely local focus and commitment has made Desert Schools and other credit unions responsive lenders even in the midst of one of the most difficult housing markets in the country. Credit unions did not cause the housing crisis; they have been responsible lenders. Even so, they and their members are not exempt from the economic fallout. But even at the extreme of foreclosure, there is a credit union difference. Mike Collum said it best, “They treat people like members; they care about them.”