Just in time for the Fourth of July, a handful of credit unions are rolling out programs to honor the military, first responders and teachers, all while hopefully adding a little extra juice to their mortgage portfolios.
“Hero” mortgage programs at CUs sometimes feature tighter underwriting or a zero down payment options, and could help spur a stagnating market. Albany-based CAP COM Federal Credit Union launched a similar program last year, and a growing number of CUs have been adding them throughout 2019. But analysts note that environmental factors could lead these to be riskier than they might have historically been.
“There definitely might be some more risk and [credit unions] need to understand that,” said Russell Cole, CEO of CUSO Home Lending. Marketing to such a specific subset of the population, he added, could also put CUs at the risk of backlash from other members who aren’t eligible for those deals. “Whenever you do a specific program, there may be other folks in the market place who look at it and say ‘What can you do for me?’” he added.
Mortgage activity across the country has been relatively weak in 2019. According to the Mortgage Bankers Association, there were $325 billion in mortgage originations in the first quarter of 2019 – the lowest dollar amount since the fourth quarter of 2014 and a 17% decline from the fourth quarter of 2018. Part of that can be attributed to home prices; a recent Corelogic report said as many as 40% of the U.S.’s top 50 housing markets are overvalued.
For Falcon Heights, Minn.-based SPIRE Credit Union, the Community Heroes program could help overcome purchasers’ struggles with the Twin Cities market. Average home prices are up by more than 5% in the last year, according to Zillow, topping $221,000, and SPIRE’s program cuts the credit union’s traditional down payment requirement from 3% to 1%.
Robin Grimes, AVP of real estate lending, said the credit union has tightened its underwriting criteria for Community Heroes applicants in order to offset the risks associated with a lower down payment. That means credit scores must be higher and debt-to-income ratios lower than normal, though members who don’t qualify may still be able to meet the credit union’s traditional mortgage stipulations.
Woodbury, Minn.-based Ideal CU’s program carries similar features, and Faith Tholkes, VP of mortgage lending operations, said the offering was inspired partly by a lack of affordable housing in the Minneapolis-St. Paul market.
“We feel the 1% down payment will alleviate some of the financial burden when buying a home, therefore, aiding in affordability,” she said.
While most institutions offering these programs also require mortgage insurance, Cole cautioned that such low down payments on high-priced homes could put some credit unions at risk.
“We’re well into a very long economic recovery; how long that’s going to last, a lot of us are trying to guess at,” he said. “All indicators are that it’s a fairly strong housing market … and has legs for the next two or three years. When that market changes [though], with little money down payments, you’re going to be underwater in a lot of those homes, so you need to look at that and see if there are ways you can mitigate that risk through mortgage insurance and other factors.”
Consumers putting so little money down on high-dollar homes may also not be fully aware of the financial burden they are placing themselves under, he noted.
“For folks who are early into the home-buying process, the amount of education you give them is key,” he said. “Obviously if you’re fitting them into a home with not a lot of money down, having them understand how to budget and make the mortgage a priority – to really educate them to be financially healthy and sound so they can survive – is key as well. If you’re just too focused on getting the loan done and getting them into the home, and not giving them the tools they need to be successful, that’s a concern.”
But affordability isn’t the only factor. Overall credit union mortgage lending in recent years has been flat at best and in many cases on the decline, according to CUNA Mutual Group’s most recent Credit Union Trends Report, though there have been a few bright spots.
At $1.77 billion-asset Achieva CU in Dunedin, Fla., mortgage volumes have stood at roughly $36 million at the end of the first quarter for the last two years, which VP of Real Estate Lending Victoria Prast attributed to lack of inventory. And the homes that are available, she added, are far too high-priced for many would-be buyers. Zillow data shows the median home price in Dunedin at just under $250,000, a 3.4% increase over the past year.
“In our markets homebuyers have quickly purchased a large percentage of homes below the $200,000 range,” Prast noted.
High flood insurance costs are also keeping many purchasers out of the market.
“In our areas many are choosing to buy attached housing or homes located further away from the suburban areas where property taxes and homeowners insurance cost are less,” she added.
“Hometown Heroes” is Achieva’s only zero down payment mortgage, and it requires a minimum 700 credit score and a 41% debt-to-income ratio, compared with a minimum 640 score and 45% DTI for other programs. The credit union has closed three “Heroes” mortgages since the product launched in March, and Prast said three more are in the pipeline along with another 22 pre-approvals.
Wider changes taking place
While the military, teachers, first responders and others might once have been among the most stable jobs out there, recent years have seen significant upheavals, including widespread teacher strikes in some cities, the longest government shutdown in U.S. history and more. All of which indicates those positions, while still reliable, may not be as foolproof for lenders as they once were.
“The environment has changed,” said Cole. “The certainty of jobs and income streams just isn’t what it used to be. You have to think about these things as we go into it.”
Cole praised these programs for providing a service to a demographic with a penchant for service, but suggested these alone may not be enough to markedly increase credit union mortgage volumes.
“I wouldn’t look at it as a huge movement in the percentage of mortgage business that we do,” he said. He added that wider opportunities still exist in the credit union mortgage market, provided CUs can adequately market their products while also ensuring they’re providing the right tools and technologies to make it easy and convenient for would-be buyers to choose credit unions over the competition.