Sir Edmund Hillary, the lanky New Zealand mountaineer and explorer who with Tenzing Norgay, his Sherpa guide, won worldwide acclaim in 1953 by becoming the first to scale the 29,035-foot summit of Mount Everest, the world's tallest peak, died this month in New Zealand. He was 88. In a recent interview on the Today Show, he said that one of the most satisfying things in life is to envision and then accomplish something that has never been done before.
On the presidential election stump in Grand Rapids on the same day as Sir Hillary’s passing, presidential hopeful Mitt Romney described three priority challenges for the State of Michigan — first, addressing the housing crisis; second, improving the jobs climate; and third, doing something about rising energy costs. All three represent huge mountains to climb and all will likely require ideas and solutions that have not yet been envisioned.
What challenges loom ahead for the credit union industry? Certainly, one comes to mind, one just as conspicuous on the nation’s economic landscape as Mount Everest is on the world’s topography — the nation’s ongoing mortgage crisis.
Arguably, the credit union mission is two-fold. First, it is obviously to serve our members. But a second and equally important facet of the credit union mission is to reach out to non-members to invite them to benefit from the credit union idea. Remember, 60 percent of Michiganians don’t belong to a credit union. When credit unions began, it was solely about new member outreach — so that part of the mission hasn’t changed.
Michigan’s housing and mortgage crisis is among the worst in the nation right now. This is largely because our economy was already suffering from the loss of manufacturing jobs before mortgage lenders expanded the problem with sub-prime, variable-rate mortgages that have further added to the depression in home prices, the rise in foreclosure filings and an increase in mortgage loan delinquency rates. Data provided by the Mortgage Bankers Association and RealtyTrac show that Michigan’s mortgage loan delinquency rate (8.34 percent) and foreclosure rate (3.07 percent) are the third-worst in the nation. Regarding the 212,000 sub-prime mortgages in Michigan, the news is worse. The 22 percent delinquency rate and 11 percent foreclosure rate rank Michigan as the worst state for delinquent sub-prime mortgage loans.
The real question for credit unions — and commercial banks, for that matter — is do we want to attempt to climb this mountain of a problem and help solve a problem that, for the most part, neither credit unions nor commercial banks contributed to? While it could certainly be argued that some banks (money center banks that own security firms and mortgage company subsidiaries) have contributed to the problem, most community banks, like credit unions, have not been a part of the sub-prime mortgage mess.
On Dec. 6, the Bush Administration announced a plan that encourages lenders and servicers to voluntarily freeze interest rates on certain sub-prime mortgages for up to five years for borrowers who are current on their loans. The rate freeze will apply to loans made at the start of 2005 through July 2007 and will cover loans that have been scheduled to rise to higher rates in 2008 and 2009.
Numerous state and federal laws are being considered or enacted by Congress and state legislatures, including Michigan’s. Most of these bills have the effect of freeing up additional funding for lenders who wish to take future mortgage risks, providing consumer protections and disclosures and providing for greater licensing and regulation of the mortgage lending industry.
On Jan. 11, Governor Granholm announced what she called the Michigan Protocol to assist homeowners facing potential foreclosure. This is a state-level equivalent of the Bush proposal with a loose, private-sector agreement on eight principles that may include voluntary rate freezes on some loans; lender commitments to reach out and help distressed borrowers; making progress reports back to OFIS; and working with the State to address issues related to abandoned properties and the effect on communities. The governor also announced the addition of additional examiners in OFIS to more effectively regulate the Michigan mortgage industry. Finally, she also referenced her “Save the Dream” program that includes legislative recommendations for expanding funding from the Michigan State Housing Development Authority (MSHDA) for both first-time, low-income homeowners as well as low-income households who wish to refinance from adjustable rate mortgages to fixed-rate mortgages. The MSHDA authorizing legislation has not yet passed the Michigan Senate. The other facet of the “Save the Dream” program is a Hotline and Web site to provide resources for those facing possible foreclosure.
It is gratifying to see the national housing and mortgage crisis finally drawing the attention of lawmakers, the president and our governor. But here is the problem: Because citizens would not likely support the notion of a bailout by federal or state government, the fixes are comprised mostly of preventative measures and voluntary programs that make for good public relations but will likely do little to address the problem.
The real problem is that, despite the many complex reasons for the housing and mortgage crisis, real solutions are nowhere in sight. One thing that virtually everyone agrees on is that the problem is bad and getting worse, and the spillover effects will affect all households and all financial institutions — not just those who contributed to the problems. These many and varied remedies don’t address the tougher issue — how can the economy provide greater incentives for measured risk-taking by traditional lenders during an economic crisis of this magnitude?
What Credit Unions Can Do
The good news is that a lot is already being done by credit unions and other lenders for existing members and customers. Many people are being helped with loan modifications, consumer information and financial education. All credit unions need to make formal assistance plans a high priority for 2008 and 2009. The multiplier effect of 350 credit unions helping their 4.4 million members in Michigan cannot be overstated.
In addition to the individual efforts by credit unions, the MCUL, in cooperation with the Michigan Bankers Association, is in the process of forming the HOME SAVER Coalition. This will be a collaborative effort by Michigan’s depository institutions to address the crisis in three ways.
First, plans are underway to create a HOME SAVER Loan Program that will work differently than anything else proposed nationally or in Michigan. In its early conceptual stages, this program would encourage banks and credit unions to refinance certain mortgage loans for borrowers who can’t be helped by existing lending standards or legislative/regulatory proposals. These would be nonconforming loans (likely unsaleable in the secondary mortgage market), offered to borrowers with as high as a 110 percent loan-to-value levels, with 30-year amortizing loans — but with seven-year balloon features, and offered to higher credit risk borrowers at near prime rates.
The other critical dynamic is the creation of a shared “excess risk pool” that would serve as a private mortgage insurance buffer. The intent is to seek some state funding to provide an incentive for the extraordinary risk-taking inherent in this program. It is also understood that state and federal regulatory approval of this plan would also be critical. Finally, only strong, stable financial institutions would be allowed to participate and only within reasonable risk parameters (i.e., no more than 1 percent of total assets). The initial target is to help 10,000 households with $1.5 billion in mortgage financing in 2008 and again in 2009.
Second, the Coalition hopes to coordinate and expand outreach efforts for informing and educating consumers with a HELPLINE and Web site that would pull together all existing resources (i.e., www.michigan.gov/savethedream) as well as new resources created by Coalition members. An important activity will be the expansion of free community seminars and “Information Fairs” that will expand consumer financial education as a preventative solution to the situation.
Third, the Coalition will identify necessary regulatory relief measures that can be acted on by state and federal regulators to help address the growing risks for financial institutions associated with their existing business, as well as the new risks associated with the HOME SAVER loan program.
The MCUL will continue to support and assist with the formation and implementation of the Coalition. Three credit unions have been identified as early participants in the formation process and were scheduled to meet with bankers, the MBA and the MCUL before the end of the month to take the next steps in forming the Coalition.
Additionally, through the MCUL’s existing committee framework, credit union representatives will be invited to participate in the process of getting good credit union industry input channeled into this process. All of these activities will be coordinated by an internal MCUL Mortgage Crisis Steering Committee headed by MCUL EVP Patrick La Pine.
For Michigan credit unions wishing to be a part of this whole effort, the obvious first step is to expand your plans and activities to help your existing members and identify ways to reach out to your communities. Don’t wait for the MCUL or anyone else to present a formal program. Your innovations and good works make a huge difference.
Secondly, get involved by offering to serve on one of the three committees that will help gather credit union input for this process. These include the Community Reinvestment Initiative’s Financial Education Workgroup, the CRI Economic Solutions Workgroup and the State/Federal Issues sub-committees of the MCUL Governmental Affairs Committee.
Finally, stay-tuned and start laying the groundwork for how your credit union might participate in this HOME SAVER loan program with up to 1 percent of your credit union’s assets. Details will be forthcoming but CEOs and boards of directors should attempt to take on a willing attitude to dedicate some resources to this program. This unprecedented example of credit union/bank cooperation with some assistance from state funding will be an example of something that has never been done before — or at least not in recent times or at this level. As this Coalition takes shape, you will also be asked to join as a member to lend your support.
Credit union as well as bank officials will certainly ask the question, “Why should we help address a problem that someone else created?” The answer should be our responsibility to our state and the communities we serve, as well as the benefits associated with helping to create a more positive (less negative) business climate. Doing nothing or doing little should not be options in this situation. For credit unions, the relevance to mission is even greater. Credit unions exist both for their members and for the future members who can benefit from our good works. People need our help and we should be up to the task of giving it to them.
The goal is to make a meaningful contribution to the problem, not to solve it entirely. The people we will help with this program will not be those who are in too deep over their heads to be helped or those who can be helped from their current lenders/servicers through the voluntary programs already announced. The target is a group of individuals who are in the middle tier, those who can make it, provided they get a legitimate helping hand.
Just as Sir Edmund Hillary described his feelings upon the first-ever ascent of Mt. Everest, the Coalition’s future members will take great satisfaction in knowing that they envisioned and accomplished something that had never been done before, especially given the societal benefits and the impact on individual lives. The stakes are high and the capabilities of Michigan’s credit union and banking industries can make a real difference as we try to address these unprecedented challenges.