The Mortgage Lending Process Are Affecting Credit Unions
By Joyce Moed
PEOIRA, Ill.–House valuation comparisons–or comps–used in the mortgage lending process are affecting credit unions’ foreclosure and short-sales, but many credit unions still report overall mortgage volume to be up.
This impact comes along with the Home Valuation Code of Conduct, which came into effect on May 1, and notes that Fannie Mae and Freddie Mac will no longer purchase mortgages from sellers that do not adopt the Code. In hopes to decrease inflated appraisals, the new code refuses reports from people selected, retained or compensated by mortgage brokers and real estate agents, based on the idea that brokers and agents have a vested interest in inflated appraisals because their commission is directly impacted on the sale price of the home.
"In the case of CEFCU, we are impacted by significantly different locations," said Keith Reynolds, VP, lending, for the $4-billion credit union.
In Central Illinois, property values have seen limited impact, Reynolds explained.
"Property sales, as measured by unit sales or media home price have seen only modest declines," he noted.
For that reason, Reynolds said that the impact on its operations has been more focused on ensuring thoroughness.
"We frequently tell approved appraisers we want five to six comps versus the old standard of three," he said. "Again, with sale numbers fairly stable, obtaining additional comps is not a major challenge. I believe most sellers have been prepped by the real estate agent as to the market reality, so as a result most sellers are not surprised to see an appraisal result with a slight value decline."
Reynolds said.
Reynolds said that the area where members would more likely be upset would be with second mortgages or home equity loans, "where the member has not kept abreast of market declines … even if they are minimal, and are shocked to find that the property valuation reflects a 5% to 7% decline over the past 12 to 18 months versus the continued 5% annual increase they had become accustomed to, locally. They think the appraiser and the comps must be flawed."
In the case of CEFCU’s operation in Silicon Valley–Valley CU–which was acquired at year end 2008, and also for members who reside in Florida and Arizona, the situation is much different, Reynolds said.
"It is not uncommon for certain, specific areas to be experiencing quarterly declines in value of 10%," he said. "Therefore, any comp older than 90 days must be subject to careful scrutiny."
Similarly, it becomes much more difficult for an appraiser to have a sufficient sample of current or applicable comps, Reynolds noted.
"In addition, comps can be frequently impacted negatively by bank-owned properties, which have been sold based on below-market discounting designed to expedite a quick sale," he said. "All these facts obviously impact the mortgage program as do members whose properties have seen valuation declines, which mitigate their ability to refinance their mortgage at the current low rates. Second mortgage loans on properties which have seen deep valuation declines have to be considered unsecured loans for all practical purposes."
Reynolds noted that home equity lines of credit, in some cases, must be revoked based on comps which reflect significant declines which impacts the member’s access to funds.
"Finally, the impact on all calculations for at-risk properties given the uncertain market prices and discounted comparable properties results in the necessity for all to rapid adjustments," he said. "This clearly impacts the collections area in administration of the mortgage portfolio as well, but that’s an issue in and of itself."
Annette Marotta, director of loan underwriting and production for Meriwest Mortgage, a subsidiary of Meriwest Credit Union in San Jose, Calif., said that over the past year, the $1.3-billion CU has seen a significant decline in the value of comparable sales in the Silicone Valley region.
"We can certainly see the effect of foreclosures and short sales on the communities we’re serving," she said. "Over the past two months we have found the prices of urban and nearby suburban homes stabilizing."
Marotta said that rural areas are currently their greatest challenge.
"Often we find ourselves in the dilemma of underwriting a loan request in some of our outlying rural areas and having no comparable sales by which to judge value," she said. "In some extreme cases where a rural area has been over-built and there has not been a sale in two years, we have had to decline the loan request. But, even with this being said, we are experiencing one of the largest mortgage loan pipelines in our history."
John Reed, president/CEO of Maine Savings FCU in Hampden, Maine, said that he can’t really put a percentage on it, but that "from time to time we do have values coming in lower than the member things their home is worth. And of course this is primarily because appraisers must use recent comps, and with sales and sales prices both down, it is hard to support past values."
Despite this, like Marotta, Reed said his CU’s mortgage program is "through the roof."
"We are seeing approximately 20% purchase money and 80% refinance," he explained. "But, our overall volume is up substantially and our market share is increasing. Maine Savings FCU mortgage volume is more than double last year at this same time and our CUSO–CUSO Mortgage Corp.–that handles mortgages for many Maine credit unions is up almost three times our 2008 volume."
According to Bill Vogeney, senior VP/chief lending officer for Ent FCU in St. Louis, Mo., and secretary/treasurer for the CUNA Lending Council, appraisers have had a tough time finding suitable comps for almost a year.
"They’re having to use older comps and make downward adjustments, or expand their marketing area," he explained. "In some nice neighborhoods that are in demand, literally no homes have sold–or are for sale–which certainly impacts the ability to get a value. In other neighborhoods, most of the comps are bank-owned properties or short-sales. They will have a negative impact on values."
Like others, Vogeney said Ent FCU is experiencing unprecedented mortgage volume due to historically low rates.
"Certainly, if values weren’t so weak, we’d be able to make more loans, but it’s not hurting our volume," he said. "On the home equity side, our volume is down maybe 25 to 30% from a year ago, but we’re also being impacted by very high levels of repayment. These are borrowers who aren’t financing–they’re paying down their indebtedness."
Lloyd Gill, chief lending officer for City County Credit Union in Fort Lauderdale, Fla., and chair of the CUNA Lending Council, said that comps are affecting the $293,000 credit union in refinances, but is not seeing a big impact on new finances.
"It’s affecting us in the sense its bringing values down. It’s hurting our refi-market, where people are trying to get every dollar they can," he said.
www.cefcu.com
www.meriwest.com
www.mainesavings.com
www.ent.com
www.citycountycu.org
www.freddiemac.com
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