Over the last week, you may have read about several actions taken by the US government in combination with financial institutions.
Last week, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Fannie Mae and Freddie Mac, were taken over by the Federal Government.
Over the weekend, Lehman Brothers, a very old, very large brokerage firm, filed for bankruptcy. Finally, Merrill Lynch, another large, old brokerage firm was forced into a purchase of its company by Bank of America. As a result of all these activities, the stock market has been in a nosedive. The cause of all of these problems is the continuing decline in home values and the rise in delinquencies and foreclosures.
What does this mean for Verity? We sell a significant amount of our mortgage loan production to Fannie Mae each month. It is very important to us that they remain in the business of buying loans. The government takeover does not change their mission of purchasing mortgages that are originated by financial institutions and mortgage companies. Our expectation is that we will not be impacted to any great degree by the takeover. We are, however, watching this situation closely for any indication that they are pulling back.
The Lehman Brothers bankruptcy and the Merrill Lynch purchase are probably non-events for Verity. We do not do business directly with them. The only concern will be if the actions cause other problems that would affect us.
The declining value of homes is the most worrisome situation. We do a lot of mortgage lending so if the value of a home falls and we have the loan on our books, we may have a problem if the borrower defaults on the loan and we have to foreclose. We have a couple of loans that we have foreclosed on currently. Overall, however, our mortgage portfolio is strong. Delinquency has climbed recently, but that is not surprising considering the weakness in the general economy. We have two factors in our favor. First, we have strong mortgage underwriting teams for both first and second mortgages and we tend to underwrite conservatively. Second, we did not get involved with sub-prime mortgages, which are the more risky mortgages at the core of the current mortgage crisis. As a result, we feel pretty good about our mortgage portfolio. We will suffer some losses, but we do not feel that they will be anywhere near as dramatic as those which caused the actions at the Federal level over the past week.
So what is next? I would expect that we will be hearing about more problems in the banking and mortgage industries. More large financial institutions may bite the dust. In our own neighborhood, Washington Mutual is in trouble and is a prime candidate for takeover by another institution. We are not immune from the general economy. A continuation of the decline in housing prices in the local area plus an increase in unemployment will impact us and we will suffer loan losses. We are part of the economy. We feel, however, that we are in better shape to withstand the problems than most institutions.
We will continue to read bad news stories in the short term and continue to evaluate their possible impact on Verity.
How do these current economic times affect Verity members?
If a member asks about this situation, here is what I would tell them:
- Verity is not experiencing mortgage foreclosures nearly as much as the financial institutions you are hearing about in the news.
- We have never done business with Lehman Brothers, Merrill Lynch, or AIG.
- Member deposits are insured by the NCUA up to $100,000 and by Excess Share Insurance for an additional $250,000.
In general, Verity is healthy and we expect to remain so.
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