According to the Wall Street Journal, 70 percent of all economists now believe that the U.S. is in a housing-led recession. The technical definition of a recession is two consecutive quarters of negative GDP growth. Most of the really bad economic news has occurred in the current quarter so it will be a while before the economic numbers support the current speculation regarding the faltering economy. Of course, as the old saying goes, “a recession is when your neighbor loses his job and a depression is when you lose your job.” As the obvious pain settles in with Michigan job losses, falling home prices, a plummeting stock market, skyrocketing foreclosure and bankruptcy filings and general consumer angst, we don’t need the official economic data to convince us that things are pretty bad.
Here are a few other pieces of cheery news from the State of Michigan. We lead the nation in outward migration; for every person that moves to Michigan, two are leaving. We also have 1.8 million people on some kind of public assistance — 18 percent of our population. I also recently heard a top Granholm official suggest that about one-third of the rest of Michigan is only a couple of paychecks away from joining the ranks of those relying on public assistance for financial survival. So where is the good news — or when will it come? I have always said that the tougher economic times make credit unions more relevant. They exist to help their members and communities get through difficult times. Unlike banks and other businesses that really exist to generate a return for shareholders, credit unions exist to provide financial opportunity in good times and bad. The term “not-for-profit” differentiates credit unions, especially in tough economic times.
This housing-led mortgage crisis should have two facets for the credit union community. The first is a no-brainer. That is, credit unions need to help their members with mortgage modifications as well as all the other traditional loan and savings products that help members save money and borrow for their financial well-being. The second facet of duty and opportunity may not be as obvious. I believe that credit unions do have both a duty and an opportunity to help address the economic challenges faced by the neighborhoods, communities and states that they serve. Again, this is what differentiates credit unions from other providers. The other for-profit financial service providers invest in the community in order to create a better business climate so shareholder returns can be maximized. The future business climate is also important for credit unions — but for very different reasons. The not-for-profit motivation should lead credit unions to reach beyond the borders of their existing membership, because as the business climate is improved, members and future members will have jobs and increasing wealth that comes with strong housing markets, a strong stock market and a higher quality of life that comes with a strong economy.
So, as the MCUL is working hard to address the housing and mortgage crisis in a coalition with the Michigan Bankers Association through the HOME SAVER Coalition, we have been working with MSHDA to create mortgage products that could help credit unions and banks take the necessary risks to help re-finance some of the 212,000 Michigan sub-prime mortgages that are on the verge of going through foreclosure. This process is both difficult and frustrating. The State is financially strapped. MSHDA is challenged by a battered bond market, where it gets its funding for purchasing loans, and by a private mortgage insurance market that is also being slammed by losses. The new “Save the Dream” loans authorized by the Michigan Legislature will offer some help to consumers via the banks and credit unions that will make the loans and then sell them to MSHDA. But with a heavy reliance on private mortgage insurance, the practicality and reach of these programs is under serious doubt.
The HOME SAVER Coalition continues to challenge MSHDA and the Granholm Administration to create a new HOME SAVER loan program that would have MSHDA or another state agency step in as a private mortgage insurer. This would enable banks and credit unions to help some of the 212,000 sub-prime borrowers by making mortgage loans that could be re-financed and held in portfolio. FDIC Chairman Ben Bernanke has testified that as much as 80 percent of these loans could be performing loans if rate adjustments could be made. These are the borrowers that credit unions should want to help once they are qualified for membership. Yes, these would be higher-risk loans and many credit unions are not positioned to take on more balance sheet risk in this economy. But many credit unions with strong capital bases and well-managed assets are in a position to look beyond their current members in search of ways to strengthen the economy by helping to address this housing crisis. Stay tuned as we hope to see some programs announced as soon as April that would help credit unions help their members and communities in this way. The first step for every credit union interested in this effort is to become a MSHDA-approved lender. The MCUL or MSHDA can help you through this process.
And if any of us needed validation for the severity of the mortgage crisis, we got it when U.S. House Banking Committee Chairman Barney Frank, D-Mass., announced his plans on March 13 to introduce the FHA Housing Stabilization & Homeownership Retention Act. This proposed legislation is mirrored by a similar plan supported by U.S. Senate Banking Committee Chairman Christopher Dodd, D-Conn. The MCUL and CUNA are extremely likely to not only support this legislation but work hard to get it quickly passed. At least initially, President Bush has expressed a reluctance to support this kind of proposal but many feel that, in an election year and given the severity of the problem, political pressure will be intense on the President and reluctant lawmakers to support this proposal.
Remarkably, the Congressional proposal is extremely similar to the proposal crafted by our HOME SAVER Coalition. The one big difference is that the national program would be dramatically larger in scope, provide far more public assistance and would be far less risky for credit unions and other lenders. The proposal would permit the FHA to provide up to $300 billion in new guarantees that would help refinance at-risk borrowers into viable mortgages. In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. The existing lender or mortgage holder would have a cash payment and no further credit exposure to the borrower. This could potentially refinance between 1 and 2 million loans — helping these families stay in their homes, protecting neighborhoods and helping stabilize the housing market.
Under the program, a borrower or existing loan servicer of an eligible loan would contact an FHA-approved lender (i.e., a credit union or bank), which would determine the size of a loan that would be consistent with the requirements of the program and that the borrower could reasonably repay. If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage. In addition to the first lien, the program gives the government a soft second lien to help defer the government’s costs and prevent unjust enrichment (i.e., borrower flipping). This plan would also provide $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes with the goal of occupying them as soon as possible. Each state’s loan and grant authority would be based on the state’s percentage of nationwide foreclosures, so Michigan would get a healthy allotment. These funds could be used by housing authorities (i.e., MSHDA), nonprofits and private-sector entities for the purchase and resale of homeownership housing. These funds could be used by MSHDA or conceivably a non-profit organized and owned by credit unions for purposes of making special loans like the HOME SAVER loan program. The MCUL will be working aggressively to find a way to tap into this grant authority to help credit unions expand their outreach to borrowers who need help. Whether through MSHDA or through a newly formed credit union organization, the grant money could help credit unions reach thousands of borrowers to help them stay in their homes through credit union assistance.
So while the MCUL works to support the passage of the Frank/Dodd legislation and also continue its work in Michigan through the HOME SAVER Coalition, the thing that each credit union can do is develop policy now to support these kinds of special mortgage lending programs with a portion of its assets. I would suggest that well-capitalized credit unions allocate as much as 1 percent of their assets for this kind of mortgage program where the loan is held in portfolio with PMI coverage covering 20 percent of the loan for borrowers who have a demonstrated capacity to pay and for whom their LTV ratios are at least 80 percent or lower as a result of a discounted payoff to the existing lender. The MCUL will work with state and federal regulators to assure that they support these efforts.
Consider the power of a program like this. With a 70 percent participation rate by well-capitalized credit unions, $250 million could be made available to help these borrowers stay in homes. With an average loan amount of $125,000, some 2,000 homeowners could be helped. The effect of fewer foreclosures would have a domino effect on neighborhoods and communities. Additionally, if the federal legislation passes and credit unions are able to fund and sell FHA loans, the capacity within the Michigan credit union industry makes it conceivable that an additional 10,000 loans could be funded and sold to FHA through a program like this. What a dramatic impact we could have on the housing and foreclosure crisis in this state!
We will continue to work with the Michigan Bankers Association through the HOME SAVER Coalition. Despite the banking industry’s attacks on the credit union industry, this crisis requires that we look beyond our differences in order to focus on a common challenge that is far greater than the decades-long feud between our industries. The scale and reach of the banking industry is needed in order to have an impact that would be 10 times as great as what credit unions could do by themselves.
So, the MCUL is encouraging action on three fronts. First, that any credit union participating in mortgage lending by itself or through a CUSO become a MSHDA-approved lender as soon as possible. Also, be ready to participate in an upcoming mortgage lending summit sponsored by the MCUL slated for Friday, May 2, at the Michigan Credit Union Center in Northville Twp.
Second, become an FHA-approved lender and be ready to support the expanded FHA program that will hopefully be established as a result of new legislation in the coming months. Third, set policy to participate in funding portfolio loans up to 1 percent of your assets subject to details that the MCUL will provide in the near future. The MCUL will provide some model policy language in the coming weeks to assist with this.
The credit union industry has always led the way in serving their members and communities during good times and bad. The growing housing and mortgage crisis requires as never before that we meet this commitment.