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.

Randy Gunderson

No biography available for this author.

4 Responses

  1. Ginny Brady says:

    Randy, although I’m not a member of Verity I am proud and impressed by the proactive tone of your post. I am a board member of a Northeastern CU and, in the last 3 months, we have been monitoring our loan portfolio carefully. We use similar criteria in writing loans for our members and so, I believe, that we can expect to ride out this storm. I am afraid that the ramifications of this financial crisis may affect our members and CU in ways we may not be able to anticipate. For example, some of our members may have multiple credit cards with other financial institutions – their rates may change dramatically which will trap our members in debt they are unable to handle. I expect that our board will be dealing with these concerns at many of our future board meetings – we’ll be looking for ways to help our members through these difficult times.

  2. Ron Bensley, Jr. says:

    Randy: The “toxic” home loan epidemic has been very unsettling. My own opinion, which may not be one others agree with, is that Uncle Sam’s policy in the past 15 years of deregulating the home-loan industry and relaxing underwriting guidelines is part of the problem. Particularly since 2001, home prices have skyrocketed far above increases in personal incomes, a trend largely driven by a government-backed policy of “no prospective homeowner left behind”. It became too easy for persons who lacked the genuine ability to afford real-estate payments, taxes, insurance and upkeep costs to get a loan based on wildly-optimistic “guesstimates” about their own future wage income and future home value.

    Thankfully, most credit unions have avoided the toxic-home-loan crisis.

    – Ron Bensley from the Bruen/Bensley Credit Union Blog (www.cbruen.com/blog)

  3. Jeff Hardin says:

    Randy –

    Terrific post – it’s good to hear that Verity, like most credit unions, make loans that make sense for individual members (as well as the entire cooperative). It’s been a difficult year for so many people in these mortgages – I share your concern for them and hope that somehow, they’ll be able to refinance into a better mortgage product.

    Happy Holidays!

  4. Denny DeGroote says:

    1-2-08

    Randy,

    Well written blog article regarding the mortgage industry fiasco. It was written in layman’s terminology, and thus easy to understand.

    I wonder if anything will be learned from this experience.

    I wonder how many have taken a similar approach to what Verity has in addressing this.

    I beleive this is an opportunity for credit unions to shine.

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