Credit Unions and the Mortgage Mess
How These Non-Profits Stayed out of the Sub-Prime Mortgage Debacle
Oct 12, 2008 Margaret M. Williams
With over 90 million members nationwide, U.S. credit unions offer an alternative to banks. These non-profit financial institutions are member-owned. Members pool their money, which in turn is used to provide loans for those members.
According to Mark Wolff, Senior Vice President of Communications for the Credit Union National Association (CUNA) (via email), U.S. credit unions have largely avoided the sub-prime meltdown. In fact, according to CUNA's website credit unions mortgage lending has increased over the past year.
Credit Unions' Structure Keeps These Financial Institutions in the Lending Market
There are two major reasons why credit unions have largely been able to avoid the worst consequences of the recent mortgage/foreclosure turmoil.
The first reason has to do with the credit union operating structure. According to Wolff, "credit unions, as not-for-profit cooperatives, are typically more conservatively managed than for-profit financial institutions. Because they return earnings back to their members rather than generate profits for outside investors, they do not have the same incentive to take risks, and so largely avoided the subprime meltdown."
CUNA Senior Economist, Mike Schenk echoed that analysis in a separate email communication. Schenk contrasts the credit union structure with that of for-profit entities like banks and mortgage brokers who seek to maximize profits, regardless of the effect on consumers. Schenk points to for-profit entities who maximize fee income from first mortgage originations, saying they have been identified as major contributors to the current sub-prime situation.
The second reason that credit unions have been able to avoid the current mortgage meltdown, according the Schenk, is that these institutions hold most of their mortgages in portfolio. He cites CUNA statistics showing that 70% of credit union mortgage originations have been held in portfolio, with only 30% having been sold into the secondary market. According the Schenk, this means that credit unions “care deeply what ultimately happens to those loans—they care if the loans are paid back.”
Schenk says that the sub-prime crisis, in contrast, has been closely linked to lenders who adopted the originate-to-sell (to the secondary market) model. “These lenders cared little about repayments because the quality of their sold loans ended up being someone else’s problem.”
Schenk's analysis is supported by the CUNA website which reports that mortgage delinquencies for U.S. credit unions were at 0.7 percent at the end of the first quarter of 2008. This compares to a national average mortgage delinquency rate of 3.32 percent for the same period as reported by TransUnion.com, a credit and information management company.
Credit Unions Included in Federal Bailout Bill
Credit unions' deposit funds are federally insured just as banks are and to the same limits. The National Credit Union Administration (NCUA), a federal regulatory agency, administers this insurance, rather than the FDIC.
While the effect of the mortgage/foreclosure crisis on U.S. credit unions has been minimal, the recently passed financial rescue legislation still includes credit unions. According to NCUA website, the Emergency Economic Stabilization Act of 2008 raises coverage levels for from $100,000 to $250,000 for both banks and credit unions.
“We felt it was important that credit unions not be excluded so that they would not be placed at a disadvantage with banks,” Wolff stated. In regard to the law's new program for selling distressed assets to the government, he added, “it remains to be seen how many [credit unions] will seek to participate, though we expect the number to be small, certainly relative to banks.”
With an operating structure and a mission that encourages conservative lending practices, U.S. credit unions have been relatively immune to the sub-prime mortgage fiasco. And with federal deposit insurance and inclusion in the federal bailout legislation, these financial institutions appear to be well positioned to deal with potential future impacts of the current economic crisis.
For more information about credit unions and the 2008 economic crisis read "Credit Unions' Financial Stability."
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