Interest rates are on the rise and the Trump administration and GOP-controlled Congress are dead-set on rolling back regulations to improve business conditions, all of which has some analysts forecasting a return to looser underwriting standards.
Credit unions by and large did not make the “bad” mortgages that led to the housing crisis, but CUs must still compete with banks for that business. So if underwriting standards fall at other lenders, how can CUs still be successful?
According to Tim Mislansky, who wears two hats as SVP and chief lending officer for $3.4 billion Wright-Patt Credit Union, plus president of the myCUmortgage CUSO, loan quality is “vastly different” from pre-crisis days. He said when a lender attempts to sell a loan to Fannie Mae or Freddie Mac, there are “significant” reviews from a data standpoint.
“The quality reviews have been moved up in the chain, which should help lower the incidence of bad loans,” he assessed. “Credit unions need to take care not to stretch too much from their underwriting criteria, because that is when you see higher losses over time.”
Mike Jennings, director of mortgage lending for $1.3 billion Advantis Credit Union, Clackamas, Ore., said, “As clichéd as this may appear, ‘The Five C’s of Credit’ should always be the driving force behind any lending decision.”
When properly applied, Jennings continued, the Five C’s of Credit, “Mitigate a litany of problems often associated with a bad mortgage loan.”
The Five C’s of Credit are:
- Character (of the borrower)
- Capacity (sufficient cash flow)
- Capital (borrower net worth)
- Collateral
- Conditions (of the borrower and overall economy).
“Any time a mortgage lending institution has forgotten or otherwise disregarded the 5 C’s of Credit, in almost every case, a bad loan decision has been the result,” Jennings asserted. “While Advantis Credit Union provides mortgage loans that we put into our own portfolio, the vast majority of the loans we have funded are underwritten and sold pursuant to Freddie Mac guidelines. That said, when Advantis underwrites a mortgage loan that we intend on placing into our own portfolio, we incorporate the same common sense underwriting standards as we would with a Freddie Mac loan. This methodology allows us to keep to our mission of providing loans to our members while ensuring the loans we make are of a good quality while at the same time, ensuring the long-term financial health of the credit union.”
A solution, not necessarily a mortgage
Vince Salinas, VP of home loans for $5.3 billion Patelco Credit Union, Pleasanton, Calif., said the solution lies in the mindset of the financial institution.
“At Patelco, we are committed to enriching the financial health of our members,” he said. “We do not push products. We do not offer interest-only loans, negative amortization loans or the other things you see making a comeback.”
Salinas said the best way to avoid putting borrowers in a “bad” mortgage is to sit down with people and talk about their goals. People are “seeking a solution,” he noted, and a mortgage “might” be that solution.
“It is incumbent on us that if a mortgage is part of that solution, we want to be getting them closer to their goals,” he declared. “I do see the industry returning to offering interest-only first mortgages and equity lending on investment properties. We will see these things come back, because those are part of the cycle of this industry. Those products were created for specific solutions, and they are not necessarily bad for everyone, but we got into trouble by giving those products to the masses. If you lose sight of your members’ financial goals, then you could be harming them with the type of loan you place them in.”
