Why Was I Dreading This Letter?

As a long-time credit union member, I’ve come to expect that I’ll be treated differently than a bank customer (AKA profit center, but I digress). So why had I been dreading the letter I got yesterday, announcing the reset of my two year ARM?

It’s probably all the news stories I’ve seen - earnings are challenging for banks and credit unions, there’s the fear of job losses, and the increasing loan delinquencies that come in a bad economy. Plus I knew my credit union could “play by the rules” of the ARM and bump up my APR on the loan by one percent, no questions asked (which in the wake of the above headlines, had become my expectation).    

It’s human nature I guess to let go of the truth about our own situation when we see a different (and in this case scarier) reality happening to others.

All across the country, people like me are opening letters from their bank - ARM resets are going up because “by the rules” they can, and credit card & other rates are heading up. All because numbers have to be hit, Wall Street fat-cats have to be pleased, and capital reserves have to be rebuilt in the wake of loans the banks shouldn’t have made in the first place.    

But I am a credit union member, and this is the notice I got in the mail: the APR on my mortgage for the next two years is adjusting DOWNWARD 50 basis points, to 4.75%.

Why is this? Because my credit union isn’t looking out for Wall Street or trying to milk a number - they’re looking out for me. 

It’s just one more - very personal - example of how credit unions are different from banks.  

Back to The Future, & The Last Big Mortgage Mess

Time to grab Dr. Emmett Brown’s DeLorean and go back in time to the last big nationwide housing market dislocation, which of course was the charming and bucolic time otherwise known as the Great Depression. According to an article in Bankrate.com by Holden Lewis, there were quite a few similarities between the mortgage products that were offered by financial institutions in the years leading up to the Depression and the garden variety subprime lender of a few years ago.

Of particular note are the following two paragraphs …

In a research report for the Federal Reserve Bank of America, authors Matthew Chambers, Carlos Garriga and Don E. Schlagenhauf wrote: “Prior to the Great Depression, the typical mortgage contract had a maturity of less than 10 years, a loan-to-value ratio of about 50 percent, repayment of interest only during the life of the contract and a balloon payment at expiration.”

Except for the low loan-to-value ratios, mortgages in the early part of the 20th century were similar to the subprime and interest-only loans that were all the rage in the first years of this century. In both eras, interest-only loans were popular. In both eras, the mortgages were time bombs: In the early 1900s, the entire loan amount was due in a lump sum after a few years; in the early 2000s, the initial interest rate on an ARM was due to skyrocket after a few years. In both eras, homeowners were expected to refinance themselves out of peril.   

Hello McFly!  

I’ve heard quite a few folks on TV praise the “innovative” mortgage products that raised homeownership levels across the country — and these innovations used as a rationale against more stringent regulation. But as you can see, the only innovation that seems to have taken place is the way the loans were chopped up and sold off to investors throughout the financial system. The loan product itself is an old idea, and one that works only in small doses and only under certain conditions.

So what happened to turn the housing crisis in the Depression? I don’t have a flux capacitor handy … but lucky for us, Bankrate’s article is instructive …

In 1933, the federal government created an agency called the Home Owners Loan Corp., or HOLC, which within three years bought one-fifth of the nation’s residential mortgages. The HOLC bailed out the owners by converting their loans to something novel: long-term, fixed-rate, amortizing mortgages. The federal government followed up by creating the Federal Housing Administration in 1934, and the 30-year-fixed with a small down payment quickly became the dominant mortgage for home purchases. The Depression-era government bailout of delinquent homeowners succeeded, and the homeownership rate climbed rapidly for three decades.  

In essence the plain, vanilla, fuddy-duddy, fixed-rate 30-year mortgage WAS the innovation that emerged to fix a broken system. And it came to us not from the banking sector, but from the federal government.

My point is not to argue for more government regulation and intervention in the housing market necessarily - that’s for others to consider. But it is interesting to learn that we’ve seen really bad times in the housing market before … and that  sadly, many borrowers are learning the lessons of history at the hands of lending institutions that should have known better.

The Housing Market Mess … One Family’s Story

 

I was listening to The Story on NC Public Radio Wednesday afternoon (which by the way is an outstanding show) and the first segment focused on the experience of Shawn Howell and his family. Shawn, who lives in Kentucky with his wife and four children,  was deployed to Iraq shortly after the family purchased their dream home.

Long story short - Shawn returned to the US after serving his country only to find out the mortgage was re-setting and as a result of this and other debts, the family would not be able to keep up with the payments. As he tells it, repeated calls to the bank that set up the loan yielded no results. The Powells weren’t looking for debt forgiveness or an outright loan renegotiation, but wanted to work with the bank to restructure the loan payments for a while until the family could get on top of things.

All these pleas were to no avail, and the family ended up losing their dream home. Today, the Powells live in a small mobile home - and two of the children have had to move in with Shawn’s first wife. 

A huge thread in Shawn’s story is that no one would help - because no one at the bank was empowered to help. And so it goes.

I’ve heard so many stories about how credit unions have helped people when they were down - and how when these calls came in, credit union staffers have looked hard for a way to help … not for a way off the phone line.

As more stories like Shawn’s unfold, hopefully we’re all taking the time to listen, and empowering people with the tools to help them solve their own problems. It’s a clear point of differentiation for credit unions, especially now that the economy is slowing.

With so many having already lost or at risk of losing their homes, Shawn’s story is unfortunately all-too-familiar. However, you do get a sense for the unique struggles that military families go though.

PR Update: Subprime Recedes, Recession Leads as Issue for 2008

The subprime mortgage issue first appeared as a mere blip on the radar screen nearly a year ago, but has reached a crescendo lately as foreclosures rise, markets fall and uncertainty reigns in the minds of many. Taken as a PR ”talking point” however, it looks to me like the subprime mortgage storyline is receding.

As you know, two credit unions in NC, State Employees’ CU and Local Government FCU, rolled out specific products in 2007 to help people in risky subprime loans. These credit unions have combined to help hundreds of families refinance out of these loans. In the process, both credit unions garnered a lot of positive earned media coverage for their efforts.

(To be clear, SECU and LGFCU obviously did not roll out these products to get earned media coverage … but in their wisdom, they saw how leveraging the PR process helped them spread the word about their products, and the mortgage products differentiated the credit unions from banks. While talking heads were offering fear, LGFCU and SECU were offering a way out for homeowners.)   

The subprime mortgage issue remains important to individual consumers and credit union members in 2008. A lot of mortgage resets loom across NC and the US in the year to come, which of course means that many people will be at risk of foreclosure. However, a few factors that were not in play in 2007 will provide clutter for credit unions that are designing mortgage products to deal specifically with subprime:

1. Mortgage rates have plummeted in the last couple of months to their lowest point in at least a couple of years. Anyone who can refinance should be able to do so pretty easily, particularly when it comes to conforming loans.
2. Last year’s headlines were all about subprime - which made LGFCU and SECU’s products newsworthy. This year, subprime as a storyline will have to share the stage with the threat of recession, stock market volatility and a raft of economic data. In short, subprime just ain’t sexy any more.
3. The federal government and the Federal Reserve are getting aggressively involved in the ills of the broader economy.

This is not to say that credit unions shouldn’t be actively communicating how they can be a relevant resource for members and consumers in the months to come … especially those who need to refinance their mortgages. However when it comes to leveraging the media, the subprime mortgage issue is literally last year’s news in my opinion.

As a result, credit unions trying to spread the word about how they can help consumers will have to refocus their messages.

Bush Administration Moving to Help (?) Subprime Loan Holders

The word on Wall Street is that Treasury Secretary Henry Paulson is crafting a deal to freeze the “teaser” rates of subprime mortgages of borrowers who would otherwise risk foreclosure when the loans reset. (Coverage here through CNBC.com.)

Details are yet to be finalized, but word has it the rates for these mortgages would be frozen for as long as five-to-seven years. According to CNBC, investors who hold these mortgages initially balked, but now are warming to idea as they realize how difficult it will be to renegotiate loan terms with borrowers on a case-by-case basis … and they realize that more costly (punitive) measures may emerge from Congress.

So what do you think? Is this a good idea, or should the government stay out of it and allow banks and credit unions to solve this problem (where possible)?

And is this potentially an opportunity missed for credit unions to step up and help (as some are already doing)?    

A “Subprime” Phone Call

I got a call from a reporter at one of the Business Journals in NC this afternoon, asking about any uptick in mortgage refi’s at credit unions as a result of the subprime mortgage mess. He had already spoken with State Employees’ Credit Union and needed more information about other credit unions that were helping out, plus general information about loan delinquencies and other indicators that members might be having a hard time meeting their mortgage obligations.

The easy part of the call was referring him to NCUA and other agencies for the statistical gobbledygook. The hard part was only having one other credit union - Local Government Federal Credit Union - that I could point him to as a credit union that is helping its members deal with bad mortgages from other lenders.

It’s quite possible that I’ve missed others who want to spread the word. If so, please call me and I’d be happy to refer this reporter and future ones to you.

However if I’m not out of the loop on this, one of three things is most likely happening …

1 - Some other credit unions are helping out their members, they just aren’t talking about it openly (which is fine, but you’re missing one heck of a branding, marketing & loyalty-building opportunity for your credit union in the community);

2- Some other credit unions don’t offer mortgages (fair enough, but are there helpful resources you can bring to the table for your members who may be trapped in a bad mortgage loan? By sharing this, you can perhaps prevent a personal financial train wreck, which is another great opportunity to build member loyalty and trust);

3- Some credit unions aren’t doing anything and haven’t talked to their members about this (I know, its not a charity you’re running … but if you haven’t said anything at all about mortgages that could possibly blow up in your member’s faces, ruining their finances and hurting your bottom line in the process … what exactly are you running?).

A common complaint I heard from credit union people during the mortgage bubble the last couple of years was that members went running after the shady guys down the street because they were able to get them in a home more quickly and flexibly than the credit union.

Well now’s your chance … not to say we told you so … but how can we help?

(Edit on 11/28 to add: Carolina Postal Credit Union is currently working up a targeted mailing to members who may be trapped in risky subprime mortgages. While details are still being worked out, the credit union is going to do what it can to assist members at risk of ARM resets that could end in foreclosure. Good going, CPCU!) 

Short Takes and Teases for A Friday

Ever seen those inane television 6 o’clock news “teases” that seemingly come on while you’re around the dinner table? Stuff like, “A new study says a popular food may kill you, and you may be eating it now … we’ll have the story at 11.” Well, this serving of CU Communicator won’t kill you (and hopefully it’s not inane), but it is going to leave you hanging just a bit. There’s good stuff happening out in NC CU Land, and I thought I’d give you a peek at what’s happening (without playing spoiler).

First, a short take … as you stock market watchers know, the Dow gave up more than 300 points yesterday … part of a rout in the global equity markets. The culprit, in part? Our old buddy, the subprime lending issue. Of course, daily movements in the markets are usually about expectations, not reality. Still, 300+ points is a big number on one day. Which leads us to our first tease …

Foreclosure is about reality, not expectations … Kudos to State Employees’ Credit Union, which is about to roll out a big number of its own very soon, perhaps even today. About six weeks ago the credit union rolled out some products aimed to help members trapped in risky subprime mortgages. Well, SECU is working up a press release that will share the dollar figure of mortgage refi’s in these products so far.

How big a number is it? Well, there’s six zeros at the end, and two crooked numbers leading the train. Like I said, it’s a big number.

Better than “the big number” though is the fact that hundreds of families in NC will keep the keys to their slice of the American Dream in their pockets, and won’t have to turn them over to an auctioneer. Hundreds helped - in just six weeks.

Again, kudos to SECU for really being about “people helping people.” If you’ve taken a pass on this issue so far and you could be helping, you might want to set aside some time today to take a look in the mirror.

Tease #2: another credit union that gets it … Carolina Postal Credit Union. In this space last week, we chatted about CPCU’s Priority Payday Checking, and the credit union’s intense focus on serving the member, not the bean counters. Yesterday, the Marketing Diva of CPCU (and world renown) blogged an update about the product … and the credit unions that are looking at adopting this program.

What the Diva won’t tell you (yet) is that the credit union is about to roll out one heck of a great product and promotion. It’s one part loan, one part slang, and one part duct tape (I’m not kidding). Best of all, it’s a great fit with their members. More to come …

Tease #3: are we having fun yet? Wow, the folks at Members Credit Union sure look to be! The credit union is putting a new spin on its annual “Football Pick ‘Em” contest this year. Click here to go to the Credit Union Warrior blog to view some videos about “Football, not Futbol.”

The CU Communicator especially enjoyed Office Destruction and Face Paint … although the keen acting abilities of CEO Jack Braswell are on display in Management Meeting.

More on how the credit union plans to use these videos next week on CU Communicator. In the meantime, be careful what you eat for dinner.

Of Starfish and Subprime Mortgages

I’m dusting off the soapbox and getting ready to climb on it here on a Thursday morning. For a random credit union league PR lackey like me, this is dangerous turf for two reasons. For one thing, the League is an organization that listens to its member credit unions before weighing in with an opinion – in effect, it’s your opinion that guides our priorities.

Secondly, I am writing to a credit union audience that is quite a bit smarter than me.

But the subprime mortgage story I’m hearing in the media has me a little ticked and I just can’t help myself. So here we go.

I recently heard a speaker reference the Loren Eiseley starfish story, which is taken from his 1978 book, The Star Thrower. In the starfish story, an older gentleman is walking the beach that is covered with hundreds of starfish washed up by the tide. He soon encounters a young man who is tossing the starfish one-by-one back in to the ocean. When the young man tells the older man he is saving the starfish, the old man remarks that with so many starfish littering so many miles of beach, the young man can’t possibly make a difference.

Upon hearing this, the young man picks up yet another starfish, tosses it into the sea and says, “It made a difference to that one.”

The starfish story reminds me of the unfolding wreck in the subprime mortgage sector. If you have not heard the specifics, the folks at the Center for Responsible Lending (among other organizations) have been researching some of the subprime mortgage products that some lenders (with Wall Street financing) have been using to make a ton of money the past few years.

Among these products is a 2/28 ARM mortgage that many customers in the subprime market have gotten the past few years. The loan includes a sexy “teaser rate” that allows people to buy bigger homes, often with little or no verification of their ability to repay the loan when the loan payment increases after two years. According to the CRL subprime loans, including the 2/28 ARM, accounted for about a quarter of mortgage originations last year.

As you might imagine, the 2/28 ARM this is a great way for mortgage companies to get rich at the expense of borrowers who would otherwise build more equity in their homes with a fixed rate mortgage. According to the CRL, this 2/28 ARM approach and its frequent flipping approach works (especially for the lender) if the housing market is appreciating, as it has done the past few years. People can count on having enough equity in the home for the mortgage company to re-finance the loan (guess who ends up with the equity …).

The problem comes in to play when the housing market cools down. People who previously could re-finance their loan or sell their homes instead get trapped in the mortgage, have their interest rate (and payment) adjusted violently upward, and end up getting foreclosed upon. According to the CRL, more than two million families nationwide are at risk of foreclosure in the next couple of years.

Two million families!

That two million families would risk losing their homes because of some greedy people is bad enough. But worse yet … and this is what really has me steamed … all the media focus has centered on the financial problems of the lenders who created the situation in the first place, with scant mention of the real people who face a crisis they may not even be aware of yet. The borrower’s side of the story remains largely untouched.

I’ve been to two meetings where the CRL presented this information to credit union people here in NC. It’s safe to say that, true to our “people-helping-people” philosophy, some credit union leaders are starting to grapple with what (if anything) can be done to help people who are caught in this mortgage trap.

I’ll leave those discussions to others, but it does occur to me that this is an opportunity for credit unions to use the PR process to tell the story with an eye to helping people who are in these terrible loan products.

I suggest that credit unions start talking about this issue with local reporters from the consumer standpoint. Let others focus attention on the impacts on Wall Street – this is a Main Street issue, and people where you live want and need to know the impacts of this story. Here are a few ideas about how you might approach this from a PR perspective, and why you should consider raising the issue:

• The word “subprime” sounds like a gristly piece of steak. It’s a depersonalizing label. This is a story about working families and people who live in your city. Be their advocate.
• Draw distinctions between your subprime lending program and those of the bad guys. You make loans to help people realize the dream of home ownership and build up assets. The bad guys make these exotic loans so they can build company and shareholder assets. In short, don’t expect people to know you’re different – it’s your job to tell them.
• On that same note, you might also outline how your credit union helps someone qualify for a mortgage (if they are not eligible at first).
• Perhaps your credit union has already refinanced a member out of a bad mortgage and they would be willing to participate in the story. Or, you could always have a loan officer share anecdotal information about who these subprime borrowers are and what you’re telling them.
• You can alert people who may be at risk that they may be able to get into a more traditional mortgage product. This is especially true since, according to the CRL, many people in these products could have qualified for a prime loan.
• You can gently remind people about the advantages of doing business with a local financial service provider.
• If we leave this story up to the banks, they’ll muck it up with bar graphs and gross domestic product projections.

Finally, please think about what your credit union can do to assist people in these mortgages. With the CRL estimating that quite a few of these people will have as much as 120% loan-to-value in these mortgages, you may not be able to do anything for many folks … but like the young man on the beach tossing starfish into the sea, it will matter to the people whom you can save from the rising tide of foreclosures.

My soapbox is now safely tucked away. Thank you for reading this.