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The Credit Union Housing RoundTable November 2008 Aaron Bresko, BECU Jon Paukovich, ENT FCU Dan Green, Prime Alliance Solutions, Inc.

©2008 BECU, Callahan Associates and Prime Alliance Solutions, Inc. All Rights Reserved.

Appoint a Housing Czar Re-Imagine Your Balance Sheet

Other papers in this year’s series:

Post Sub Prime Housing Finance

Acknowledgements The CU Housing RoundTable is indebted to the authors of this paper, without whom this work would not be possible. Their donation of time, talent and expertise for the purpose of advancing credit union housing finance is greatly appreciated. The White Paper series is truly a collaborative effort. The RoundTable would also like to acknowledge the following individuals who attended the Third Annual Meeting. Their contributions throughout the meeting shaped the final version of this paper, especially the proposed Member Mortgage Relief Initiative.

Penny Adair Charlie Mac

Carlos Griego Sandia Laboratory FCU

Norman Okimoto Hawaiian Tel FCU

Maxine Allen ORNL FCU

Douglas Grout SELCO Community CU

Kerry Oldenburg Prime Alliance Solutions, Inc

Tracy Ashfield Prime Alliance Solutions, Inc

Gary Hails Silver State Schools CU

Denise Ouellette Oakmont Advisors, LLC

Joe Barron WesCorp

Nizar Hashlamon Prime Alliance Solutions, Inc

Fred Becker NAFCU

Betsy Henkel Pentagon FCU

Lori Pinto PA Loan Servicing, Powered By Cenlar

Brian Best Grow Financial FCU

Francois Henriquez U.S. Central FCU

Tanya Boggs Space Coast CU

Mercy Jimnez

Joseph Brancucci BECU Bruns, Greg Verity CU Shelly Calhoun IBM Southeast Employees’ FCU Robert Chavez Sandia Laboratory FCU Linda Clampitt C U Members Mortgage Janita Clausell ORNL FCU Kevin Collins Star One CU Bob Dorsa ACUMA

Dale Kerslake Cascade FCU Joe Kleeman Patelco CU Lorraine Lachapelle CU Members Mortgage Marcia Lightfoot Woodstone CU Robert Lund Beth Page FCU Rick Marshall MidWest Loans Steve Mase DEXMA Dawn McCarn Unitus Community CU

Paul Emanuels Valley First CU

David Miller PA Loan Servicing, Powered By Cenlar

Chip Filson Callahan & Associates

Beth Millstein Fannie Mae

Aurora Geis San Antonio FCU

Tim Mislansky Wright-Patt Credit Unions

Jamie Gray First Tech CU

Richard Mullen Coastal FCU

Daniel Green Prime Alliance Solutions, Inc

Gary Oakland BECU

Jerry Reed Alaska USA FCU John Reed CUSO Mortgage Corp Scott Richter Eli Lilly FCU Carlyn Roy OSU FCU Carol Safberg Star One CU Marla Shapiro Travis CU Hank Sigmon First Tech CU Scott Strand BECU Bill Strunk SACU Robert Tort CU National Mortgage Pete Valerioti Tropical FCU Jim Wagy Tropical Financial CU EC Williams Grow Financial FCU Larry Wilson Coastal FCU Robert Zearfoss Randolph-Brooks FCU

Post-Sub-prime Housing Finance Table of Contents

The CU Housing RoundTable...................................................... 4 The Housing RoundTable’s Positioning Statement ............................... 4 Big, Hairy, Audacious Goals ..................................................................... 4

Permanent Changes in U.S. Housing Finance........................... 5 Members Need Credit Unions..................................................... 9 Mortgage Literacy: The Housing Buyer’s Greatest Need ...................... 9

Programs, Products and Pricing: Positioning Credit Unions for the Decade Ahead...................................................................... 12 Programs ................................................................................................. 12 Products .................................................................................................. 14 Mortgage Relief ...................................................................................... 16 Structuring Mortgage Relief Programs ................................................ 18

Summary and Next Steps.......................................................... 19 Exhibit I Home Valuation Code of Conduct.............................. 23

© 2006 - 2008 CU Housing RoundTable. All Rights Reserved

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The CU Housing RoundTable The CU Housing RoundTable® was founded by BECU, Callahan and Associates and Prime Alliance Solutions, Inc., as a forum for credit unions to create and exchange strategies that make housing more attainable for more credit union members. The RoundTable is a volunteer group open to all credit unions and credit union organizations. To learn more about the CU Housing RoundTable, visit the web site at

The Housing RoundTable’s Positioning Statement The CU Housing RoundTable (CUHRT) exists for the purpose of raising public awareness of the credit union system as a premier source of member friendly mortgage loans. The RoundTable will foster cooperation and collaboration among credit union system entities to ensure a heightened sense of public awareness and to ensure credit unions have access to timely, accurate information about housing finance policy, strategy and operations. It will identify issues and address solutions that facilitate the system's success in all aspects of housing finance. The networking capabilities of the internet plus periodic meetings will be used to create a virtual organization that is open to all credit unions and credit union organizations who wish to participate either on a long-term or ad hoc basis. The result of these efforts will be increased credit union market share, enhanced industry capability, expertise in housing finance, and recognition of the unique ability credit unions have to address the country's housing needs today and in the future due to their local presence and member focus.

Big, Hairy, Audacious Goals The term ‘Big, Hairy, Audacious Goal’ or BHAG was coined by James Collins and Jerry Porras in their 1996 article entitled Building Your Company's Vision. The idea, of course, is that every organization ought to establish a goal that is, perhaps, ever so outlandishly out of reach. Thinking that good advice, the CU Housing RoundTable, during its first annual meeting in 2006, determined that a BHAG for the credit union system was in order. The Goal: Achieve 10% share of the annual U.S. Housing market by 2016. From 1996 to 2006 the industry managed to achieve just 2% each year, without much fluctuation plus or minus. Our fortunes brightened in 2007. Credit unions closed 2007 at 2.6% for the year; fourth quarter share reached 3.6%. While we’re benefitting from the crisis in the mortgage markets, the time to seize the long-term opportunity is now. What follows is another in a series of CU Housing RoundTable White Papers that strategically help credit unions do just that. This paper, ‘Post-Sub-prime Housing Finance’, recognizes the housing finance market has changed in a cataclysmic sense: the old ways of doing business are not coming back. The traditional borrower is a thing of the past. Antique loan products, the venerable fixed rate loans of old, are back in favor. Lending in the post-sub-prime era will be different and full of opportunity for those who are prepared.

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Permanent Changes in U.S. Housing Finance Not since the Federal Credit Union Act was amended in 1978 have credit unions had a better opportunity to seize a leading position as prominent mortgage lenders. The turmoil in the mortgage and financial markets of the last two years is unprecedented. The uncovering of greed and excess that occurred in the mortgage industry will dramatically alter the future landscape for mortgage lenders. The emerging market model may be somewhat ‘barbell’ shaped, with many small, community-based mortgage lenders (i.e., credit unions) and very large mortgage lenders (i.e., Wells Fargo), with very few intermediate-sized lenders in between. The secondary market picture looks very different as well. Graph I titled, 'The Single Family Mortgage Related Securities Share', covers just 24 months and displays just 4 lines: market share positions of Fannie Mae, Freddie Mac, Ginnie Mae and Private Label mortgage-backed securities. Graph I

Single-Family Mortgage Related Securities Share Fannie Mae Freddie Mac Ginnie Mae Private Label

75% 60%

Fannie Mae 46.1%


Freddie Mac 30.0% 23.1% Ginnie Mae

30% 15%

Private Label 0.8%

0% 6








6 J-0





7 7 7 7 J-0 M-0 M-0 J-0













Source: Compiled by Fannie Mae from publicly available sources.

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A picture is worth a thousand words. Wall Street held the mortgage-backed securities market through June 2007. It did so by making a market using new models and innovative products to advance the housing finance industry. Their ability to securitize loans and attract new capital, the argument went, rendered the Government Sponsored Enterprise (Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Bank) models obsolete. Secondary market housing finance in the decades ahead, it appears, will again be supported by Fannie Mae and Freddie Mac, albeit in an incarnation somewhat different than their historical structures, and by Ginnie Mae, buyer of FHA loans. While the structure of the secondary markets is beyond the scope of this Paper, it is covered in the CU Housing RoundTable companion paper entitled ‘Re-Imagine Your Balance Sheet’. It is summarized here, however, to illustrate the dynamic nature of the markets and what appears to be a return to more traditional forms of mortgage finance. Why this will occur, however, is relevant to how we proceed as credit unions. It is also important background for understanding how credit unions will finance homes for members in the years ahead. There are at least six reasons the mortgage markets are undergoing metamorphosis: 1. Liquidity. Credit unions have ample amounts of liquidity and net worth to fund mortgage loans, for now. Net worth, once in excess of seven percent,1 exceeds the NCUA’s well-capitalized designation. The industry also has inexpensive access to borrowings through the Federal Home Loan Bank System 2 (FHLB) or Corporate Credit Unions. Larger lenders, credit unions among them, will retain their access to the secondary markets. They also have the ability to increase liquidity by attracting deposits through large branch networks. Large non-credit union lenders will have access to other borrowing sources based on their credit ratings. Smaller and intermediate-sized lenders will struggle because they typically are not as well capitalized, and they don’t have the access to cheaper financing in the capital markets. Numerous examples of this ‘squeeze’ were seen throughout the first and second quarters of 2008. Thornburg Mortgage is a good illustration of an intermediate-sized firm with a solid operation being diminished by the shrinking secondary market for non-agency paper. 2. Business Models. Larger competitors will re-align their business models to the new market reality. They have expensive infrastructure which requires enormous volume to make an acceptable return on investment. As total mortgage originations decline nationwide, the larger lenders will engage in normal, historical retrenching to make an acceptable return on investment. This will result in the consolidation of operations facilities and the usual deterioration in service. Thus, any savings from efficiencies gained will be passed back to the corporation. Service will be allowed to deteriorate. Credit unions can fill this vacuum by delivering exceptional service to the local market and still be very competitive on rates and fees. As the purchase market continues to be the key component, 1 As of March, 2008, the industry’s net worth was 11.10% according to CUNA and Affiliates “Economic and

Credit Union Forecast 2008 & 2008.” 2

The Federal Home Loan Bank’s program, while a possible source of borrowing, is in question as the secondary markets continue to evolve. During August 2008, for example, the Federal Home Loan Bank of Atlanta temporarily ceased its mortgage purchase program.

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delivering outstanding service will be a strategic credit union advantage. But credit unions need to commit to a consistent strategy of marketing and service execution. Collaboration, a strategic advantage enjoyed by credit unions far in excess of their lender competitors, allows this industry to aggregate its buying power to negotiate better terms from third party service providers. 3. The mortgage broker industry will change dramatically. During the peak of the frenzy 18 to 24 months ago, mortgage brokers originated as much as twothirds of the business. In recent months their share has dropped below 40%, and it continues to fall. Traditionally, brokers have had very low capitalization with which to cushion the shock from adverse economic circumstances. They proliferated in the sub-prime and Alt-A era through easy processing (no document verification required) and fat margins. Originating high volumes at three to four hundred basis point gains on every loan allowed them to pocket a yield spread premium and some additional fees, resulting in a very nice profit. Typically, this profit would not be re-invested back in the business. Rather, it paid current expenses and funded lavish lifestyles. As secondary market investors finally began performing due diligence and began exercising their right to force buy backs for bad loans, brokers and smaller mortgage bankers didn’t have the capital to meet their obligations. This caused a domino effect. Brokers folded their tents. Organizations that bought from brokers collapsed: witness New Century. Many large lenders also determined third party originations (loans sourced through brokers) were underperforming their direct originations. Many large lenders exited third party originations altogether. In addition, many brokers got into the business during the hey days without the knowledge or the skills to originate fully documented Agency 3 business, which is what remains in the market today. Credit unions know their member; they also know how to document loan files to Agency standards. The relationships credit unions have forged with Fannie Mae, Freddie Mac and the FHLB System are now more important than ever and the envy of the brokerage community. Many credit unions also service their own loans (or private label through sub-servicers). This has become more important to borrowers as the abuses by some of the larger lenders have become apparent. 4. Regulatory Environment. The regulatory environment will most likely get more hostile for mortgage brokers. More states have enacted licensing, continuing education and bonding requirements. These increase the barriers to entry or the costs of staying in the industry. In addition, state regulators have required additional disclosures of items such as yield spread and servicing release premiums. They have also banned pre-payment penalties and other dubious business practices such as appraisal influence.4 In addition, it is likely federal regulatory reform will occur in the next few years that will tighten the regulation of third party origination. Real Estate Settlement Procedures Act (RESPA) reform has been proposed that would impact all lenders but more so on mortgage brokers. Fannie and Freddie are proposing to ban brokers from ordering their own appraisals, which could significantly affect their business models. The regulatory environment for credit unions will become more difficult as well. At the Board level NCUA has publicly said all year long that credit unions should continue to provide mortgage loans to their members, provided that such lending 3 Fannie Mae, Freddie Mac, Ginnie Mae, Federal Home Loan Bank. 4

See the proposed Home Valuation Code of Conduct attached as Exhibit I.

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is conducted in a safe and sound manner. Board members are not signaling a retreat, which would be easy enough to do given the state of the market. At the examine / examiner level we know mortgage portfolios are being scrutinized, especially from a collateral angle. Regulators want credit unions to understand the effect home values have on their assets and what that presages for future delinquencies and foreclosures. The fear, of course, is all the market’s bad news will conspire to negatively influence regulators, credit union boards of directors and management. 5. Trust. Trust is an integral part of the home finance business through every step of the process. The reputations of mortgage brokers as well as many once prominent mortgage lenders have been permanently tarnished by the exposure of their predatory lending practices or their lack of concern for borrower welfare. Companies such as Countrywide, once the nation’s largest mortgage lender, no longer exist. Other large S&L’s focused heavily on Option ARM programs that were marketed to borrowers who did not understand the terms of the loan. Many of these borrowers are now in foreclosure or are seriously delinquent and their lives have been permanently altered. The proliferation of these types of programs artificially inflated the real estate market. Once the growth couldn’t be sustained by economic fundamentals, the truth became evident. The result has been a drag on the overall economy and domino effect extending to many financial institutions, including some of Wall Street’s biggest and oldest names. Rampant mortgage fraud, especially in the mortgage brokerage industry, has also weakened the foundation of the financial housing system. This is going to result in regulatory changes that will make it more difficult for mortgage brokers to compete (see #4). Credit unions own the trust issue and can leverage this to their advantage. With the ability to portfolio those loans that make mutual financial sense, credit unions remain true to their founding philosophies. Service to members and building member relationships, take precedence over the profit motive that inspires mortgage brokers. 6. The Appeal of Mortgage Lending. Decreases in other types of lending, core credit union lending products such as home equity and auto lending, conspire to make mortgage lending more appealing. Auto loan margins are very thin due to strong competitiveness. Once the core lending product, it can no longer singlehandedly support credit union financial performance. Home equity lending, another core product, is a mixed bag. While home values have decreased in many parts of the country, credit union members tend to have greater equity in their homes. Rather than trade up, many members are choosing to remain in their homes, upgrading and remodeling them using their equity to finance improvements. Home equity will remain an important product, yet mortgage lending is the perfect opportunity to make quality loans, earn fee income and expand relationships with members. The typical mortgage member has many multiple services with the credit union. There are many tools available to manage the interest rate risks if credit unions would take the time to learn about and implement them.

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Members Need Credit Unions The general public needed credit unions long before 1934 as an alternative to abusive lenders and lending practices. Not much has changed. While credit unions have done a good job of shielding members from many less than savory lending schemes, the industry, though capable, was not recognized as a trustworthy, reliable lender until the market came crashing down in mid-year 2007. Clearing through the rubble, it’s apparent members need housing finance education, financing alternatives that are affordable and sustainable and, for the next several years, sub-prime lending rescue programs.

Mortgage Literacy: The Housing Buyer’s Greatest Need What’s the most important lesson learned from the sub-prime crisis? Mortgage literacy is abysmally low. How else could otherwise intelligent people end up in inappropriate loan products they couldn’t possibly afford? A case in point. A middle-aged couple with five children, two still at home attending high school, personally built their dream home on wooded land with river frontage in a small community where he has taught school for many years. She owns a small business in town. They’re the average American home-owning couple, one of many who resorted to inappropriate sub-prime loans to support their lifestyle. At first their mortgage improved their cash-flow, which was a constant struggle with a growing business and children in school. Once rates increased and payments starting rising, however, they soon realized the true cost of their financing arrangement might be their home. When they went looking for help, they began with the mortgage broker who originated their loan. He was nowhere to be found. The lender, a name everyone in the mortgage business recognizes, wasn’t much interested in helping either, initially seeing foreclosure as the ultimate solution. Will they lose the family home they built themselves? It remains a touch and go situation. The lender has relented somewhat. As its foreclosures mounted and its real estate owned (REO) portfolio blossomed, negotiations have become easier. You’ve heard stories like this. Perhaps you know people in this situation. Certainly your credit union has distressed members in similar circumstances. While it’s mission-appropriate to help those members who can be helped, it’s philosophically the role of credit unions to prevent this from happening. Credit unions were chartered to promote the responsible use of credit. While our education mission has always been important, the stakes don’t get any higher than the potential loss of a home. Let’s re-commit to member education, this time emphasizing housing finance. Members, and your communities, will thank you for it in the form of increased mortgage business. Credit unions need a new, fresh approach to home financing and home buying education. Although it is not our industry’s role to teach personal responsibility, nor is that even possible, credit unions do need to recognize a phenomenon spawned by the sub-prime crisis: people, members, will walk away from homes as easily as some once walked away from automobiles if they believe it solves their problem. They’re walking away from cars, boats, RVs, motorcycles and other ‘toys’ as a means to immediately shed debt regardless of the consequences. This new psyche is a

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potentially bad omen: there’s no longer a stigma attached to defaulting on obligations, even though these actions will appear on credit reports for years, affecting future ability to borrow. Certainly immediate education can help; it may even convince some members to think before taking such a drastic approach to dealing with their immediate financial concerns. This new ‘drop debt’ demographic raises other questions: how, as lenders, do we model and score based on these new borrower thought processes? See the ‘Mortgage Relief’ section of this paper for some thoughts on lending in the post-sub-prime world. Curriculum, what we need to teach, is straightforward: the basics of housing finance. Consider how the lender / investor community is dealing with the sub-prime apocalypse. As early as the fourth quarter of 2007 the GSEs, other conduits, lenders and mortgage loan investors began adjusting their criteria. Consider: 1. Loan documentation is once again important. No- or low-doc loans, one of the darlings of the sub-prime literati, are no longer in vogue. Investors and lenders want to know borrowers have jobs, income and assets. 2. Debt to Income Ratios, originally the cornerstone of mortgage loan underwriting, all but disappeared or were considered less relevant as long ago as the late 1990s. No more. While it’s difficult to conceive a return to 28/36 5 lending, ratios are once again an important tool in the underwriter’s arsenal. 3. Collateral matters. The Appraisal Code of Conduct, a set of rules proposed by New York’s Attorney General and nominally adopted by the GSEs, 6 makes clear that those that conduct valuations of any type are to be completely independent of the lender and lender influence. These rules were borne out of the alleged abuses of the appraiser community by several large lenders during the height of the sub-prime boom. 4. Equity is important. One-hundred percent loan-to-value, not to mention onehundred-twenty-five percent LTVs are, for most consumers, a thing of the past. As one credit union director mentioned earlier this year, 100% financing is little more than renting. People who rent typically feel less attached to their properties and tend to move more frequently than the average homeowner. No equity equates to little or no attachment. That’s become clear with high LTV borrowers. High LTV lending is still possible, albeit expensive, as the market has returned to pricing for risk. Knowing how the industry thinks guides us in our efforts to teach members how to sustainably finance their homes now that the rules have changed or, more accurately, have returned to the more traditional practices of the past. Appropriate curriculum topics might include:


28/36 refers to the traditional ‘approvable’ debt-to-income ratios all ‘old-school’ mortgage lenders were taught when they entered the business. 28%, the front-end ratio, is simply the mortgage payment divided by the borrower’s monthly income. 36% is the back-end ratio, which takes into account not only the mortgage payment but all other consumer debt. This calculation was performed as a measure of ability to pay. When automated underwriting entered the industry, these ratios were, and are, allowed to rise given other borrower characteristics. 6

The Appraisal Code of Conduct was agreed to by the GSEs during the first quarter of 2008, pending a comment period that may result in modification of the proposed rules prior to their becoming effective in 2009.

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1. 2. 3. 4. 5. 6.

What you qualify for is different than what you can afford. ‘All Things Considered’: The impact of homeownership on your budget. Making your own assessment of a home’s value. Controlling the purchase of your home. Choosing your lender. Questions you should ask.

While the curriculum itself is rather traditional, delivery will have to be non-traditional if we expect members and potential members to consume it. We’re a time-starved population that finds it increasingly difficult to dedicate evenings or weekends to traditional, in-person, classroom style education. Fortunately there are alternatives. Podcasts, now easily produced in both audio and video formats, can be available through every credit union’s website (see the Sidebar on Ent FCU’s use of podcasts). YouTube is another medium credit unions should explore. Short, entertaining, informative videos on what to consider when buying a home, how to evaluate the purchase of a home and how to control the transaction, if done properly, would be an interesting way to deliver the message and, as an added benefit, help disseminate the credit union message.

© 2006 - 2008 CU Housing RoundTable. All Rights Reserved

Podcasts by Ent FCU Ent Federal Credit Union members can now find the answers to their financial questions via new free financial education podcasts on The podcasts are designed to provide information on a variety of subjects such as avoiding foreclosure and understanding credit reports. The credit union is currently working on podcasts addressing NCUA insurance questions and firsttime home buying with the goal of producing a new podcast every month.

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Programs, Products and Pricing: Positioning Credit Unions for the Decade Ahead Programs Should credit unions be all things to all members, or should we target specific segments of our members and potential members for our housing finance services? Cases can be made for both approaches, yet providing financing programs for specific member segments opens up a tremendous opportunity to develop long-term relationships. A segmented approach may also help our industry with another strategic, demographic challenge we face: aging membership. As the average age of members increases above today’s figure of 48 years, we’re faced with the reality that older members save more while borrowing less. We’ll have liquidity, certainly, but no one to lend it to. Rather than search for alternative investments or turn credit unions into investment unions, the wiser path is to search out new niches of younger borrowing members. The best investment a credit union can make, according to credit union pioneer Richard W. Ayres, is a loan to a member. Consequently, the RoundTable believes focusing on two niche markets may help us attract younger members who are looking for reliable, trustworthy lenders. The first niche is the emerging or surging markets: Asian, Hispanic, Indian, Middle Eastern and other groups who are moving to the United States, are unfamiliar with our credit system and are interested in homeownership. Niche market lending will be different for every credit union, and it will depend on the community(ies) you serve.

Consumers Credit Union Emerging market lending, a

strategy Prime Alliance has been promoting for more than three years, may fit your membership well. For an excellent example of a credit union that has executed an outstanding emerging markets strategy visit consumers to view the Consumers Credit Union Video. Consumers focuses on the Hispanic market, and their story is remarkable. The video will take less than five minutes of your time; the best, most strategic five minutes you'll spend today

Credit unions have always been niche lenders; there’s really very little new in this strategy. By another name we know niche marketing as SEG marketing or service to our sponsor groups. While the world has changed since the days of single SEGs, the concept remains the same. So does the execution. We’ve been exceptional at niche marketing since the 1930s. This is a return to our roots. Let’s show our members and potential members how it’s done.

First-time Buyers are possibly the ultimate ‘Two-fer’ strategy. Credit unions that embrace first-time buyers get a bonus: new borrowers and younger members. Here’s how we figure it. Credit unions everywhere are looking for consistent, reliable sources of housing financing business. First-time buyers are a market niche tailormade for credit unions. They’re looking for information, education and convenience, three things at which we excel. We’re looking for long-term member relationships. Once members become homeowners, their financial service needs blossom. Consequently, it’s a perfect match. We’ll close their mortgage then proceed to help them with all their future needs.

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The other benefit, the second part of the ‘Two-fer’ strategy, is this: first-time buyers tend to be younger, in their twenties and thirties. Credit union membership, as we all know, is getting older and, as people age they tend to borrow less and save more. If your credit union has a goal of lowering the average age of its membership, then adopting a first-time buyer strategy is completely complementary.

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Products You’ll need the right product mix for your members and your communities. Back to basics seems to be the best, most common sense approach. Mortgage lending, like high fashion, has gone retro. Conventional, conforming fixed rate and straightforward adjustable rate loans are sexy today for one simple reason: members understand them. They can affordably sustain them. Most people, with the exception of your more sophisticated borrowers, are done with the exotics. Another item that should be on your menu is Government Loans. FHA lending, specifically, is up and coming and important (refer back to Graph I). Some industry experts put FHA volume at as much as 30% of all lending in as soon as 18 months. This is another example of everything old is new again. FHA lending never really went away; it’s just that not much of it has been done in the last decade. It was replaced, temporarily, with Alternative A and sub-prime products because those were perceived as easier to originate and, perhaps falsely so, as a less costly means of financing a home. FHA lending has changed. These loans have become easier to originate, aided by a more common-sense approach and technologies that aid in the required loan calculations and decisioning. New guidelines now allow for larger loan amounts and down payments can be as low as 3%. Government lending was the original affordability program, aimed at lower and moderate income wage earners buying their first homes. FHA lending fits, therefore, with a niche focus on emerging markets and first-time homebuyers. There’s a misperception that gaining HUD approval to originate FHA loans is difficult. It’s not. The approval is easy. Gathering the extensive and sometimes seemingly arcane documentation required to support a credit union’s application for approval is, however, time-consuming. The Housing RoundTable recommends beginning the process immediately. Additional information is available at While working on your credit union’s HUD approval, there are two other steps to be taken concurrently. First, get educated. There are many excellent sources for FHA lending education. Originating, processing, underwriting and closing these loans is different than conventional conforming lending. Invest the time and effort necessary to become a proficient lender. It will add to your credibility and increase the level of service you’ll provide to your members. The second step the Housing RoundTable recommends while working on your approval is to partner with a reputable FHA lender. There are several organizations within the credit union system that can help. Your credit union can begin providing these loans to your members immediately. The added benefit to this approach is that it is a good way to learn Government Lending. Once approved, you’ll be confident in your credit union’s abilities. Still not sure Government Lending is for you? Consider this: former hard-money lenders, the sub-prime originators who refuse to give up, are turning their attention to FHA Lending as one significant way to replace the business they’ve lost. Don’t let them get the jump on you.

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Our portfolios are an important lending tool for this market. An astonishing prediction: by 2009 there will be 40% fewer mortgage brokers plying their trade due, in part, to the fact that their sources of funds have or will all but disappear. Portfolio lenders, like credit unions, will take their place. The CU Housing RoundTable’s companion White Paper entitled, ‘Re-imaging Your Balance Sheet’ addresses, in part, the product mix credit unions should consider and the practical and prudent ways in which we can use our balance sheets to offer them.

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Mortgage Relief Mortgage Relief Landscape The U.S. economy has changed again, experiencing yet another bursting bubble. The late 1990s saw the dot-com crash. This time around housing is the issue. Most economies recover after such events; most are, however, forever changed as a result. The US housing market, the way we think about homes, buy them and finance them has changed as a result of the sub-prime apocalypse, most likely for decades to come. Immediately this calls for servicing mortgage loans in ways different from those employed by most credit unions. Homes in many areas are depreciating in value; a phenomenon not seen since at least the 1980s. When just 18 months ago it was almost always possible to sell a home at at least a slight profit, many members are now stuck in homes they cannot afford. Another complicating factor is this: many Americans fueled their lifestyles with the equity in their homes. With decreasing equity, their buying power has been greatly diminished in a time when the costs of goods and services seem to be ever-increasing. Lenders generally, including credit unions, are experiencing foreclosure levels not seen for decades. The landscape has changed, and we need to focus efforts on the resources necessary to creatively service real estate debt in a down market. Instilling a Mortgage Relief Culture Credit unions, by definition, are member advocates. Current market conditions dictate, however, that this advocacy position be taken to a higher, proactive level permeating the credit union at all levels. For the next several years Mortgage Relief must become culturally central to our role as providers of housing finance. Where to begin. It’s not enough to react to member need as it arises. It is often too late by then. The first step is attuning the organization to watching all membes for signs of distress. Many of these signs will appear in places other than the first mortgage portfolio. Credit unions have been, after all, much more prolific home equity and auto lenders than first mortgage lenders. Issues are likely to show in these two areas first and, most likely, in home equity loans before anywhere else. Early delinquency in either of these portfolios could signal a larger problem and a member in need. Collectors, especially, should be trained to look for these signs and educated on the ways in which the credit union can assist members in distress. Yet watching for the early warning signs may not be proactive enough. Highly targeted marketing allows us to know who among our members owns homes, who they financed with, the type of loan they have and the interest rate they are paying. With this almost perfect knowledge, we can target members who appear to be in distress or could be headed that way. This allows us to reach out, putting an almost perfect, custom offering in front of every one that’s in need of assistance. General awareness advertising can be helpful as well, though Mortgage Relief will not work for all members, so it must be used judiciously. One approach is

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member education in the form of newsletters, statement stuffers and podcasts (see Mortgage Literacy). After 30 years as mortgage lenders many members still don’t realize their credit union finances homes. Without that basic knoweldge, very few will think of their credit union as a provider of Mortgage Relief. When instilling a culture of Mortgage Relief, credit unions can learn from subprime lenders. Historically most sub-prime loans were ‘story loans’. Sub-prime lenders, since the loans they made lacked documentation, typically took the time to understand the borrower’s story before pricing the loan and agreeing to make it. Financing members out of sub-prime loans also requires understanding their story. Every situation is different, every member motivation is different. Mortgage Relief is predominantly for those members that wish to remain in their homes. Making sure that is part of their ‘story’ is important to the future performace of a Relief loan.

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Structuring Mortgage Relief Programs CU Examples of Mortgage Relief Programs BECU implemented a relief program combining ability and willingness to pay as the two main criteria for qualifying. Analytics help determine ability. Willingness is harder to determine, currently best gauged by the member’s story. And, although willingness appears more quantitative than qualitative, the possibility of analytics are being explored. The credit union has three objectives for every relief loan: 1) Provide members the opportunity to remain in their home; 2) secure the credit union’s position; and 3) cover the credit union’s debt. BECU offers a very low rate (their lowest published 5/1 ARM) with the payment fixed for five years. The only added cost to the rate is a selfinsurance increase for loans over 80% LTV. When Relief isn’t Possible Two things need to be present for a mortgage relief program to be successful: ability and willingness to pay. If both do not exist, a viable long-term solution cannot be reached. First, there must be a willingness to pay. Consumers who may be under water by tens and even thousands of dollars may find it easier to give up or walk away from their home, rather than keeping their commitments. Either they don’t have the patience or don’t think there’s a reasonable chance of catching up on their negative equity. One practice deployed has been to buy a “second home” at today’s market prices while their credit is still good and then walk away from the original. Second, without the ‘ability’ or capacity to pay, it doesn’t matter how much the consumer wants to pay, they simply cannot afford the property. If the ability to pay is a temporary situation, modifications and forbearances may be appropriate, but long-term ability to pay is a must for any relief program to work.

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Summary and Next Steps Housing finance has changed as a result of sub-prime lending excesses whose origins date back as far as 1999. Exotic products, created, originated, packaged and purchased with little regard for lending basics, brought us to this point. What mortgage lenders are left with, or facing, depending on how we choose to look at the current situation, is not so much a brave new world as a return to the old world of lending, peppered with a few lessons learned. What does this mean for credit unions? It’s good news. The very type of lending consumers now value - understandable, affordable, sustainable - - is credit union lending. Our industry’s opportunities have never been richer nor have market conditions ever been more favorable. The time for credit union housing finance is now. Let’s seize the moment. Actionable next steps are an important aspect of all Housing RoundTable activities. During its Third Annual Meeting on October 16 and 17, 2008, the participants created the concept for a $1 billion Member Mortgage Relief Program. The idea, explained fully on the next two pages, involves using funds from the Central Liquidity Facility (CLF) for a three year program to make it easier for credit unions to help members in need.

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Member Mortgage Relief Initiative “Operation Credit Union Home for the Holidays” Credit Union Housing Round Table (October 27,2008) The most urgent challenge facing America today is how to provide mortgage relief to consumers with real financial hardship. There is only one system that can do this quickly, efficiently, and in the consumer’s best interest—and without a dime of taxpayer money. That system is the integrated credit union network through the CLF, Corporates and natural person credit unions. Meeting this critical need for homeowner relief is the most important issue Congress and the Administration confronted in requesting the $750 billion economic stabilization legislation in September. However, after passage, no one has found a way to deliver funds effectively to consumers in need. Credit unions are part of the solution to this challenge. The system is in place, ready to go, and credit unions are eager to provide the leadership. The cooperative program below outlines how this can be done in the next 30 days. Concept: Implement a cooperative, system-wide credit union initiative to assist members having difficulty meeting their mortgage payments with a three-year, fixed-rate real estate loan modification program. Purpose: To provide immediate relief to members in impacted communities by facilitating credit availability in support of Administration efforts to enhance the flow of credit. Source of Funding: NCUA via the CLF, (using its protracted lending authority), and the corporate credit union agent network will lend $1 billion to CUs to assist in making loan modifications for first- and second lien borrowers suffering economic hardship. Potential Effect: At June 30, 2008, total outstanding 1st mortgages were $201.7 billion. Outstanding seconds were $94.4 billion for a total of $296.1 billion in mortgage secured loans, financing homes for between 3 and 4 million members. By and large credit unions did not make sub-prime loans. They are, however, experiencing ‘collateral damage’: some members who used sub-prime loans from other lenders are experiencing difficulty. To wit, at June 30, 2008 total delinquent first mortgage and junior lien loans were $1.58 billion (.78%) and $737.2 million, respectively. The average first delinquent loan is $126,000. The average junior lien is $34,000. Total mortgage related delinquency is $2.3 billion, up from $1.98 billion 12 months earlier. In addition to delinquent loans, credit unions report OREO’s of $477.4 million at June 30, 2008 an increase from $211.6 million 12 months earlier.

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Additionally credit unions have charged off $324.2 million in real estate secured loans in the first six months of 2008, an increase of 173% over the previous year. By reducing the rate of charge-offs, credit unions can stabilize their capital. Acting to stabilize these delinquent situations will assist members, reduce foreclosures in impacted housing markets and provide credit unions a proactive initiative for reaching out to their members. Program Design Eligibility: 1. All credit union members in good standing with a first or second real estate loan with any credit union. 2. Member must be in economic distress. Credit unions must act in good faith when distributing these funds. Examples of how such distributions might be used include, but are not limited to, distress caused by loss of job or income, significant financial impact due to natural disaster, disability, serious household illness, or death of spouse; or, underlying first mortgage is a subprime, option ARM, or negative amortization mortgage with significant adjustment in payment. 3. The loan(s) must be on a member’s primary residence only; investment properties and second homes are not eligible. 4. Member MUST state their desire to retain their home. Use of Funds: 1. Existing Loan modification: for a period of three years, modify the payments to reflect a non-negative amortization reduction in the rate based on the cost of the advance used to fund the modification. 2. Payoff: Payoff of first mortgage to combine with second mortgage held by credit union: terms of the new loan as above for the first three years, with conventional terms thereafter. Loan should not exceed 100% of current appraised value. In the event it does, a specific loan loss reserve for the difference must be created. 3. Bring Existing Mortgage Current: Funds can be used up to $10,000 preferably with recorded lien to bring current existing mortgages held by credit union for distressed members. Payments on this must begin six months following the disbursement of the funds to the member.

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Action Plan / Next Steps 1. NCUA confirms availability and probable rate of fixed rate, three-year term borrowing of $1 billion from the CLF 2. Appoint a steering committee for the program. The Committee will include Gary Oakland, CEO BECU, Kirk Kordeleski, CEO Bethpage FCU, Douglas Fecher, CEO, Wright-Patt CU, Doug Samuels, CEO, Spacecoast CU, Robert Siravo, CEO Wescorp, two NCUA senior staffers and the president of the CLF. 3. Publish plan details and hold webinar with steering committee by Friday, November 7 for all credit unions. The webinar will provide best practices guidance for this program. 4. Take initial estimates of volumes from Corporate Agents and direct CLF members by November 14. Allocate $1.0 billion using specified criteria, including degree of housing area problem and credit union capability to assist the community. 5. Begin loan disbursements, Monday November 17 and complete funding by December 15th. 6. Each credit union lender will report three items: amount of loan modifications, number of loans by 1st and seconds, and best estimates of amount members saved versus existing loan terms over the three years. 7. Steering committee evaluate data, incorporate examiner and credit union information, report results and make recommendations to the NCUA Board and credit union community not later than December 31, 2008. Program results will also be given to other agencies as necessary to support the protracted credit advance. For additional information, contact Gary Oakland, President and CEO, BECU at

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Exhibit I Home Valuation Code of Conduct

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Home Valuation Code of Conduct I.


No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to: 1)

withholding or threatening to withhold timely payment for an appraisal report;


withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser 1 ;


expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;


conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from an appraiser;


requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report;


providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;


providing to an appraiser, appraisal management company, or any entity or person related to the appraiser or appraisal management company, stock or other financial or non-financial benefits;


allowing the removal of an appraiser from a list of qualified appraisers used by any entity, without prior written notice to such appraiser, which notice shall include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice

An “Appraiser� must be licensed or certified by the state in which the property to be appraised is located.

(USPAP) or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior; 9)

ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such appraisal or automated valuation model is done pursuant to a bona fide pre- or post-funding appraisal review or quality control process; or


any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality.

Nothing in this section shall be construed as prohibiting the lender (or any third party acting on behalf of the lender) from requesting that an appraiser (i) provide additional information or explanation about the basis for a valuation, or (ii) correct objective factual errors in an appraisal report. II.

The lender shall ensure that the borrower is provided, free of charge, a copy of any appraisal report concerning the borrower’s subject property immediately upon completion, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the appraisal.


The lender or any third-party specifically authorized by the lender (including, but not limited to, appraisal management companies and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third-party (including mortgage brokers and real estate agents).


All members of the lender’s loan production staff, as well as any person (i) who is compensated on a commission basis upon the successful completion of a loan or (ii) who reports, ultimately, to any officer of the lender other than either the Chief Compliance Officer, General Counsel, or any officer who is not independent of the loan production staff and process, shall be forbidden from: (1) selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender; (2) any communications with an appraiser, including ordering or managing an appraisal assignment; and (3) working together in the same organizational unit, or being directly supervised by the same manager, as any person who is involved in the selection, retention, recommendation of, or communication with any appraiser. If absolute lines of independence cannot be achieved as a result of the originator’s small size and limited staff, the lender must be able to clearly demonstrate that it has prudent

safeguards to isolate its collateral evaluation process from influence or interference from its loan production process. V.

Any employee of the lender (or if the lender retains an appraisal management company, any employee of that company) tasked with selecting appraisers for an approved panel or substantive appraisal review must be (1) appropriately trained and qualified in the area of real estate and appraisals, and (2) in the case of an employee of the lender, wholly independent of the loan production staff and process.


In underwriting a loan, the lender shall not utilize any appraisal report prepared by an appraiser employed by: (1) the lender; (2) an affiliate of the lender; (3) an entity that is owned, in whole or in part, by the lender; (4) an entity that owns, in whole or in part, the lender (5) a real estate “settlement services” provider, as that term is defined in the Real Estate Settlement Procedures Act, 12 U.S.C.§ 2601 et seq.; (6) an entity that is owned, in whole or in part, by a “settlement services” provider. The lender also shall not use any appraisal report obtained by or through an appraisal management company that is owned by the lender or an affiliate of the lender, provided that the foregoing prohibitions do not apply where the lender has an ownership interest in the appraisal management company of 20% or less and where (i) the lender has no involvement in the day-to-day business operations of the appraisal management company, (ii) the appraisal management company is operated independently, and (iii) the lender plays no role in the selection of individual appraisers or any panel of approved appraisers used by the appraisal management company. Notwithstanding these prohibitions, the lender may use in-house staff appraisers to (i) order appraisals, (ii) conduct appraisal reviews or other quality control, whether pre-funding or post-funding, (iii) develop, deploy, or use internal automated valuation models, or (iv) prepare appraisals in connection with transactions other than mortgage origination transactions (e.g. loan workouts).


The lender will establish a telephone hotline and an email address to receive any complaints from appraisers, individuals, or any other entities concerning the improper influencing or attempted improper influencing of appraisers or the

appraisal process, which hotline and email address shall be attended only by a member of the office of the General Counsel, Chief Compliance Officer or other independent officer. In addition: (1) each appraiser now or hereafter on any list of approved appraisers, or, upon retention by the lender, will be notified, in a separate document, of the hotline and email address and their purpose; and (2) each borrower, as part of a cover letter accompanying the provided appraisal, will be notified of the hotline and email address and their purpose. Within 72 hours of receiving any complaint, the lender will begin a preliminary investigation of the complaint and upon completing the inquiry (or, after a period not to exceed 60 days, whichever shall come first) shall notify the Independent Valuation Protection Institute and any relevant regulatory bodies of any indication of improper conduct. The name and any identifying information of the person or entity that has filed such a complaint shall be kept in strictest confidence by the office of the General Counsel, Chief Compliance Officer or other independent officer, except as required by law. The lender shall not retaliate, in any manner or method, against the person or entity which makes such a complaint. VIII.

The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, of a randomly-selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations which are used by the lender, including the results of automated valuation models, broker’s price opinions or “desktop� evaluations. The lender shall report the results of such quality control testing to the Independent Valuation Protection Institute and any relevant regulatory bodies.


Any lender who has a reasonable basis to believe an appraiser is violating applicable laws, or is otherwise engaging in unethical conduct, shall promptly refer the matter to the Independent Valuation Protection Institute and to the applicable State appraiser certifying and licensing agency.


The lender shall certify, warrant and represent that the appraisal report was obtained in a manner consistent with this Code of Conduct.


Nothing in this Code shall be construed to establish new requirements or obligations that (1) require a lender to obtain a property valuation, or to use any particular method for property valuation (such as an appraisal or automated valuation model) in connection with any mortgage loan or mortgage financing transaction, or (2) affect the acceptable scope of work for an appraiser in connection with a particular assignment.


........................... Permanent Changes in U.S. Housing Finance 5 Programs, Products and Pricing: Positioning Credit Unions for ........