This is an important story…I only wish I knew all of the implications!!!
The other day I received an e-mail with a PDF document attached from Verity’s portfolio managers in Chicago. The only thing the sender, an Executive with the firm wrote was “This is an important story…I only wish I knew all of the implications!!!” That was enough to stir my curiosity so I opened the attachment. It was a Bloomberg press-release discussing losses just reported by Freddie Mac and it nearly made me sick. Here are a few quotes:
The worst housing slump in 16 years caused significant deterioration in the 3rd quarter that will continue through year-end. Freddie Mac
Freddie Mac and Fannie Mae, two institutions created by Congress to foster American home ownership, lost $41 billion in market value this year. The companies will have less money available for new mortgages. Bloomberg
The housing market is the worst since the Great Depression. Wells Fargo
Foreclosure filings doubled to 223,538 in September from a year earlier as subprime borrowers struggled to make payments on adjustable rate mortgages. RealtyTrac
So here I sit trying to digest this along with all of the other bad news in the mortgage market and wonder…how does this affect Verity? We hold nearly $195 million in first and second mortgage loans, which equates to almost 70% of our total lending portfolio. Do we have a lot of exposure? What should we do? Yikes! After I stopped hyperventilating, I remembered a few basic facts about the way Verity does mortgage loans:
Verity does not offer option-ARM loans. These are those loans that allow the borrower to make tiny payments on huge balances, resulting in negative amortization and are the loan of choice for lenders dealing with subprime borrowers.
Verity is upfront and honest about what a borrower can afford. Some lenders sold borrowers loans that they couldn’t afford and sometimes had the borrower misrepresent income or assets to qualify. We don’t do that.
Verity only makes loans in Washington. Right now, our little corner of the country has been spared the drastic drops in home values that have plagued other parts of the country.
It’s sad to see what is going on as a result of the subprime mess. By the time it’s all said and done, millions of borrowers will have lost their homes, thousands of mortgage-related businesses will shut their doors putting millions of employees out of work. That’s not going to happen here because we were prudent, but I’ve got a number of friends that are in that line of work and I worry for them and their families.
A few weeks ago I was talking with some auditors about lending and they said that when making a loan, the borrower’s cash flow is considerably more important than their collateral. Unfortunately, many lenders didn’t adhere to that rule of thumb and instead bet that housing prices would continue to rise and even if the borrower defaulted, they could take the home, sell it and not lose money. Unfortunately, that line of thinking didn’t pan out and now here we are. It will probably get worse before it gets better. For Verity’s member-owners, however, we can feel good about the fact that our credit union will still be here and making loans because we place honesty and integrity above profits.
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