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As Lenders Tighten Mortgage Standards, Credit Unions Stay the Course

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By Amy Hoak

RISMEDIA, August 23, 2007—(MarketWatch)—As many mortgage lenders tighten loan underwriting standards and interest rates on jumbo mortgages rise, consumers may be able to find a friend in their credit union.

One reason: Many (although not all) of the mortgage loans made by credit unions are held in their own portfolios and therefore don’t need to be sold to investors, said Bill Hampel, chief economist for the Credit Union National Association and Affiliates.

“A credit union considering a mortgage loan application doesn’t have as many things to worry about as a mortgage banker that has to sell that to a secondary mortgage market,” he said.

Selling nonconforming loans in the secondary market over the past few weeks has been a challenge, as the market has been repricing the risk associated with mortgage loans that aren’t bought by Freddie Mac and Fannie Mae. As a result, some loan products have been removed from lenders’ offerings, while lending standards have tightened on other products, perhaps requiring better credit scores or larger down payments from borrowers. At credit unions, however, underwriting standards haven’t needed to change, Hampel said.

And while the rates on jumbo loans offered by many lenders went “haywire” over the past couple of weeks, at credit unions the rates on those loans haven’t experienced a jump, Hampel said. Jumbo loans are those that exceed the conforming loan limit of $417,000 in most states.

“Many borrowers will find a credit union an easier place to get a mortgage right now than other lenders,” he said.

And consumers seem to be discovering this, according to Steve VanSickler, chief lending officer at Red Rocks Credit Union in Highlands Ranch, Colo.

“Without a doubt, we are seeing increased traffic,” he said.

Credit union mission

Even if it’s a good time to head to the credit union for a mortgage, it’s important to point out that these institutions are far from being risk takers. They’re not-for-profit, co-op organizations that were founded with a main mission to serve members.

It’s not that they “cherry pick” borrowers who are approved for a mortgage, VanSickler said. “Credit unions still have higher approval rates to lower income borrowers,” he pointed out.

But there’s a more measured approach to how that mortgage works with the member’s overall financial picture, since the credit union is often that borrower’s primary institution, he added.

Plus, the majority of mortgage products at credit unions don’t tend to be risky — regardless of what is going on in the rest of the lending market, said Jay Johnson, executive vice president of Callahan & Associates, a national credit union research and consulting firm.

“They’re not likely to get into exotic products and jump on the bandwagon,” Johnson said.

Subprime loans never thrived in credit unions, Hampel said. And the Alt-A mortgages that require little documentation are used sparingly, he added, usually with members who are well known to the credit union and have belonged for a long time. That way, the credit union can confirm that a borrower has a steady history of income into a savings or checking account, he said.

As a way to address high-cost housing markets, credit unions have also offered 40-year mortgages and interest-only loans, Hampel said. But only if they fit the borrower’s needs.

“We don’t want to get members into a deal where they will likely lose their home,” he said.

The approach tends to work: Last year, the net charge-off rate for credit union mortgages was 0.02%, he said. The net charge-off rate is the amount lost in default minus the amount the credit union is able to recoup through the sale of the property.

If the borrower does see trouble coming around the bend regarding a mortgage, credit unions can often address it before the payments are late, Hampel said. Many of them also partner with credit-counseling agencies to help borrowers in a pinch, Johnson said.

How to find a credit union

One of the tricks for consumers interested in working with a credit union for a home loan is finding one that makes them. There are about 8,000 credit unions throughout the country, but only 3,500 of those do first-mortgage lending, Johnson said.

In order to join a credit union, individuals must meet the institution’s criteria. A credit union’s “field of membership” can be an employer, a church, a school, a community or another subset, according to the Credit Union National Association’s Web site.
The Web site has a searchable directory for consumers to find credit unions throughout the country.

Amy Hoak is a MarketWatch reporter based in Chicago.

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