By now we all know the sub-prime mortgage crisis has become a global financial pandemic. Markets world-wide are a mess. As one anonymous quipster put it, "Anyone who isn't completely confused doesn't know what's going on." Even Alan Greenspan, in testimony before Congress last week, admitted how surprised he was that markets didn't self-regulate in such a way that this morass could have been avoided.
It's not that hard to figure out, really. One need look no further than the Seven Deadly Sins, discovered personally by keen fourth century thinker and writer Ponticus, who apparently lived them all before amending his ways. Placed in the context of the current crisis, each one makes perfect sense in it's own way. The average consumer lusted after homes they could ill-afford, some driven by envy of those owned by their neighbors and friends. Investors, greedy for ever-increasing profits, gluttonously gnawed through endless meals of exotic mortgage products. While we're talking about investors, let's add pride: the oft-repeated refrain, "our models accurately predict risk," can be found in numerous press accounts. Anyone who disagreed was wrathfully and regularly reminded they were wrong. Slothful mortgage origination, in the form now conveniently categorized as 'liar loans', became the rule rather than the exception. Lust, gluttony, greed, sloth, wrath, envy and pride were all on the original list, and what a list it is. There's enough in this disaster for each to fill a chapter or two of a book on the subject. Maybe someone will do exactly that.
That's not my purpose, though, just a way to give context to two simple thoughts credit unions can and are employing to directly get members past this crisis, and, in our own little way, help the economy through it as well. The first is this: all real estate is local
. Prior to 1980 and the Depository Deregulation and Monetary Control Act (DIDMCA) of that same year, the majority of real estate lending was done locally by Savings and Loans that were of
their communities. They knew the neighborhoods, they knew local employers, understood local economies and often knew their borrowers personally. Mortgage default and foreclosure occurred, though much less often than today. Moreover, such difficulties were typically triggered by unforeseen issues in local economies. Other than local catastrophes, housing finance hummed along quite nicely, thank you, from post-World War II until DIDMCA changed housing finance for the next 28 years, that is, until the present day.
All real estate is local. So are many credit unions. The model that worked so well for the S&L industry, that they intimately 'knew' their environments, is the credit union model. One of our biggest strengths, and one of the reasons our lending portfolios perform well even in markets such as today's, is that we know our members and we're well-acquainted with our communities. What I am suggesting isn't radical. I'm suggesting we keep doing what we were chartered to do, only better. I'll get to the idea of better in a moment.
The second simple idea is this: all mortgage loans are personal
. The mortgage industry began forgetting this as early as 1999, the year that will come to be known as the beginning of the sub-prime crisis of 2007, but that's a subject for another day. Lenders and investors forgot first, followed by borrowers who developed selective amnesia. What happened seemed subtle at the time, yet it's profound: rather than seeing a home as shelter, everyone began to see houses as investments. Homes as shelters turned into houses as investments. Average homeowners became real estate speculators. The mortgage industry, with it's whale-like appetite, was more than happy to oblige with perceived inexpensive financing. While this might seem a 'chicken or egg' argument, it really isn't. Easy financing came first, Joe lunchbox as real estate speculator soon followed.
All mortgages are personal. By and large, credit unions didn't forget this simple fact either. How many members who were interested in buying a home way beyond their means came to you during the go-go days? How many of these did you turn away, only to have them finance their 'dream homes' elsewhere? How many have come back to you recently for help? All mortgages are personal because housing is, too. Houses aren't mere investments, they are homes that provide shelter and build community. Responsible lenders finance them with loans that are long-term affordable and wholly sustainable. Sounds like the definition of a credit union to me.
A moment ago I posited that we should keep doing what we're doing, only better. Getting deeply into 'better' could be the subject of another book on the subject. It is, in fact, the subject of two of the CU Housing RoundTable's 2008 White Papers. One, entitled 'Post Sub Prime Housing Finance' explores important environmental factors of this brave new lending world. The second, 'Appoint a Housing Czar' suggests that every very successful mortgage lending credit union has someone who is passionately responsible for housing finance, their 'Czar'. Providing suggestions on fostering an environment to support such an individual as well as what to look for in a Czar, are its twin topics. Both will be available November 3 on the CU Housing RoundTable's website (www.cuhousingroundtable.com
Everyone's heard of the Seven Deadly Sins. Familiar with the Seven Virtues? While not all apply to organizations such as ours, turns out credit unions were chartered to practice more than a few of them, something we regularly do. Getting through and beyond the current crisis requires we stick to doing what we do well, then doing it better. Have suggestions? Drop me an email at email@example.com