Read Web-only bonus coverage from this article. Read more about how CUs prefer to avoid foreclosure in 'Keep the Lights on' And read 'Responsible Debt Relief' And read about how to promote thrift to members in 'CUs' Next Trick.'

Rising From Ashes
Like a phoenix flies out of the flames, members in financial trouble are getting help from CUs and finding a way out.

By Karen Bankston

Editor's note: The following first appeared in the April 2009 issue of Credit Union Management.

To talk with credit union mortgage lenders across the country is to hear tale after tale of woe. Members bowled over by the one-two punch of layoffs and evaporating equity. Scam artists masquerading as debt counselors. Borrowers walking away from a big mortgage to buy a vastly devalued house down the street. Opportunistic real estate investors trying to pull off even shorter sales (in which the balance on the loan exceeds the home's value) by talking homeowners out of what value their property still holds.  

Shining through those stories are instances of people doing the right thing. As CUs work with members to save their homes and protect their credit, they demonstrate the slow but steady impact of chipping away at the mortgage crisis and stabilizing neighborhoods one house at a time.

Gains From Loss
When they are forced to foreclose, some CUs are looking for opportunities to offer a fresh start. For example, Dort Federal Credit Union gave two families a "Home for the Holidays" in December. The board of the $380 million, Flint, Mich., credit union authorized a budget to renovate two foreclosed homes and promote the giveaway.

Applicants were required to write a personal essay, meet income and creditworthiness guidelines and reside within the CU's field of membership. "Our goal was to identify families who needed housing and could afford to maintain and sustain these homes as homes," explains Jenny Ludwigsen, Dort FCU's director of marketing. "The homes are without a mortgage, but they will have the responsibility to pay insurance and taxes," including income taxes on the gifted property. 

The Home for the Holidays project turned into a community event. Dort FCU enlisted the assistance of representatives from local social service organizations in the selection process and in providing food, housing and other support services to many of the applicants. And local media tripled Dort FCU's promotion budget with additional airtime, billboards and newspaper ads.

Of 100 initial applicants, the 32 who met the qualifications had a personal interview with the selection committee. The new homeowners, chosen from eight finalists, signed a five-year contract to ensure that they wouldn't turn around and sell the property. It specifies that if the home is sold this year, 100 percent of the proceeds would go to the CU, 75 percent in 2010, and so on, with full ownership to be turned over in 2013.

"We had to put a lot of thought into this and consulted with attorneys and CPAs to make sure we were doing the right thing by the credit union and the new homeowners," Ludwigsen says.

$6.9 billion, 693,000-member The Golden 1 Credit Union, Sacramento, Calif., took a similar approach with a single-family home on a one-acre plot, turning the property over to Habitat for Humanity with the provision that the nonprofit group build multiple homes there for low-income families.

"We had been working with the borrower, but he decided it was not in his best interest to continue and walked away," says CEO Teresa Halleck, a CUES member. "There had been some changes to the property that were not up to code, and it was in need of serious renovations. Instead of selling it, probably to an investor interested in just buying and flipping it, we thought this would provide greater value to the community."

The Golden 1 CU's gift brought Sacramento's new mayor out to the site and local media coverage as 100 California Highway Patrol cadets turned out to help build the new homes. That story brought a "positive spin" in a region that has been hard hit by the downward mortgage spiral, says Halleck, who received a personal letter from a member expressing pride in the CU's contribution to Habitat. 

Focus On The Basics
Other approaches to the mortgage morass may not make headlines, but they are helping members ride out the economic downturn. At Ent in Colorado Springs, the focus is on the basics in the form of proactive, responsive and supportive outreach to mortgage holders, says SVP/Chief Lending Officer Bill Vogeney, a CUES member.

The $2.5 billion credit union with 192,000 members monitors credit scores to reach out to hard-hit borrowers with reduced rates and payments. It aims to respond quickly on necessary deals-within 24 to 48 hours in comparison to the 60 or 90 days reported for some snowed-under mortgage lenders.

Even if members are forced to sell short, getting back less than they owe, they and the CU will likely fare better than in a foreclosure, he notes. For one borrower who accepted a short-sale offer, Ent worked out a no-interest loan for the $30,000 remaining on the mortgage, which means the credit union will be repaid and the member's credit rating won't tank.

"You can't go in with any preconceived notions," Vogeney advises. "You need to review how they were when you made the loan and what's their situation now. What's the real value of the home? Will their situation likely get worse or better in the near term? You have to try to answer those questions and respond promptly."

Ent also tries to help members steer clear of profiteers. He cites an example of an investor pushing for a short sale claiming $50,000 in structural damage to the home. "We investigated and found that the damage was more cosmetic than anything, maybe $1,500 worth of work," he notes.

The credit union recommends that members who are having a hard time selling their homes talk to the same Realtors Ent uses for its foreclosed properties. Those experienced real estate professionals "know what needs to be done" to move a house even in a slow market. "We don't force members to sell the home as-is and get what they can," Vogeney says. "If we can make some reasonable investment to help the home show well, we can get a better price."

A Realtor working with one member who was out of work because of health problems recommended a $10,000 facelift for a house that had been sitting on the market for months. "It was a nice house, but the wallpaper was outdated and it needed fresh paint," he recalls. "We were willing to advance the money to get the work done, but then the Realtor found a buyer who loved the location and could see past the need for cosmetic work. There's an old saying that there's a lid for every pot."

Personal Approach
The good that can come of bad debt also is evident in the many examples of CUs working patiently with members struggling to make mortgage payments. CUES member Richard T. Webb, president/CEO of $70 million, 11,500-member Atlantic Financial Federal Credit Union, Hunt Valley, Md., shares the story of a member who was consistently a month or two behind on her condo payments. Over several months, the CU counseled and coached to keep her from falling further behind. Once, Webb even drove to her condo to pick up a check to keep the member from falling officially 60 days past due.

About the same time, Atlantic Financial FCU got a notice from a law firm that it was proceeding with foreclosure against the member to collect back taxes, so the credit union paid the tax bill and expanded her mortgage. Then came another court notice seeking payment on condo fees and another advance from the credit union.

By this time, the principal on the member's mortgage had increased by $10,000 to $144,000. "She had paid five years on a 30-year mortgage at 8 percent, so we worked with her to drop her mortgage rate to 5.5 percent and extend the term back out to 30 years," Webb says. "And we created an escrow account with payroll deduction to cover taxes and condo fees, which was doable because of her lower payments."

In presentations to school, church and community groups, Webb talks about the personal approach CUs take with members. "When they first came out with TARP, that's what the federal government said they were going to do with all mortgage holders, but there's no way they've got the time and resources to do that," he notes. "It's just too expensive" on such a large scale.

This one-on-one approach can succeed, but it is time consuming and at times disheartening. "The last thing we want is to take a property back," Halleck says. "What's unfortunate is that sometimes they won't even return your calls. You can't work with someone if they won't talk to you."

For members suffering temporary setbacks, The Golden 1 CU might offer the option to skip a payment or extend the loan term to reduce monthly payments. "When people have lost their job, we can wait awhile if they have prospects, but some, unfortunately, have no job prospects," she says.

Innovation From Desperation
To deal with the harsh realities of the current mortgage market, The Golden 1 CU developed two new options in early 2008. The Mortgage Repair Loan is designed for new or existing members who lost their home to foreclosure with another lender over a mortgage with, if not predatory, at least consumer-unfriendly terms. The credit union will not disqualify borrowers for that lone foreclosure if they can come up with a down payment for a new home and otherwise meet income and credit guidelines.

The Golden 1 CU has yet to close a loan under this program. "We've had people call the credit union, but most of them were still in their homes and weighing their options to walk away," Halleck says. "So far, we have no takers who have the ability to carry the debt and with a strong enough credit rating before the foreclosure. Some may just be waiting out the market. There's a sense that housing values have not hit bottom yet."

The Golden 1 CU's other offering is the Mortgage Rescue, designed for homeowners who are behind on their payments with another lender but haven't yet been foreclosed. For those borrowers, the credit union offers to negotiate with their existing lenders to refinance for an amount less than the total owed to take the loan off their books.

For example, if the homeowner owes $400,000 on a home currently valued at $300,000, The Golden 1 CU might agree to a mortgage at the lesser amount, which would keep the borrower in the house and allow the current lender to get a loan in default off its books while saving the costs of a foreclosure sale.

Again, the CU has yet to close on a Mortgage Rescue loan, but that might just be because other lenders "may be overwhelmed by the number of people who are defaulting right now," Halleck says. "But we are trying to be out there in the market with these types of solutions. Consumers are caught in the middle, watching interest rates and the market, and we're trying to be there to help. It's a very interesting dynamic."

Karen Bankston is a free-lance writer and editor and the proprietor of Precision Prose in Stoughton, Wis. She writes about credit unions, business and technology.

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