Should credit unions step into a giant breach gradually being vacated by the big banks, or is the bank pull-out a sign that CUs should do the same?
JPMorgan Chase, the largest bank in the U.S., has exited the business of making home loans insured by the Federal Housing Administration in a dramatic way — and more big banks may follow them out the door as well.
Most large banks have already curtailed FHA-backed loans in the past two years because of concerns about credit and legal risks, and JPMorgan's astounding 98% drop-off in that period puts an exclamation mark on the trend. The $1.8 trillion-asset bank’s FHA market share was a mere 0.2% at June 30, compared with 12.2% just two years earlier, according to government data crunched by the American Enterprise Institute's International Center on Housing Risk. Indeed, JPMorgan chairman and chief executive Jamie Dimon himself warned last year that the risks of FHA lending were just too great.
Also, the roll-back among big banks follows harsh penalties meted out by the Justice Department, which accused many banks of putting FHA on the hook for shoddy loans in the years leading up to the mortgage meltdown.
Overall, large banks’ share of FHA-insured purchase-only home loans has dropped sharply since February. Large banks originated 23.5% of FHA loans in August, down from 29.6% in February and 65.4% in November 2012, when AEI first began tracking the data.
However, nonbank rivals have stepped into the void. Nonbanks’ share jumped to 68% in August, up from 62.2% in February and 26.8% in November 2012, virtually replacing the share ceded by large banks. This shift is not expected to reverse until bank executives feel more comfortable with the credit profiles of many FHA borrowers and determine the odds of further federal prosecutions have fallen.
With a small down payment of 3.5%, nominal upfront mortgage insurance and annual mortgage insurance, FHA loans are designed to make housing more affordable for low-income consumers. It's a segment many credit unions are well-suited to serve, but historically, not many CUs have participated in the FHA program. According to Callahan and Associates, the credit union industry had only about 1.1% of the FHA market as of 2014.
But other nonbanks already have a big stake in FHA — indeed, retail mortgage lender Quicken Loans is the single largest player in this arena.
Richard Socha-Mower, director of consumer and real estate lending at Member One FCU, a $713 milllion institution based in Roanoke, Va., endorses the FHA model for credit unions.
"Programs such as the FHA loan are important to maximizing market share potential in the future," he said. "Credit unions have several options for borrowers that would best fit their needs. Credit unions are moving in a direction to provide several options to its membership for home ownership. This includes the FHA loan product."
Among credit unions, one of the biggest players in FHA-backed loan market is Navy Federal Credit Union, the $70 billion behemoth based in Vienna, Va. But even at Navy, FHA currently accounts for a small portion of its overall loan business.
Katie Miller, vice president of mortgage lending at Navy, told Credit union Journal that FHA loans "make up about 3% of our total loan volume, as the bulk of our loan volume originates from VA loans." But she added that Navy Federal provides several options for first-time homebuyers, FHA loans being one of them. "Providing FHA loans gives our members more options as we guide them through the mortgage process," she said.
Similarly, Socha-Mower said his credit union has provided FHA loans since 2012 and finds the program "valuable to our membership, especially first-time homebuyers."
"Our purpose for real estate lending at Member One is to provide as many options as possible to meet all our members’ needs," he asserted.
The FHA program, he said, has allowed Member One's members to achieve the dream of home ownership, adding that in his experience of making FHA loans, the credit profile of the FHA applicant is not much different from other loan programs.
"The main delinquency issues from the 2008 era were created from subprime lending and the guidelines used to grant credit for those requests, not FHA lending," he explained.
Robert Ashbaugh, senior risk management consultant at Sageworks, a firm that provides financial analysis solutions, industry data, and risk management solutions, also believes the exit of the big banks could be a good opportunity for credit unions.
Oddly enough, the reasons so few credit unions do FHA loans are, are also reasons more credit unions should do them.
"Credit unions tend to keep their FHA portfolios smaller than their conventional programs for much the same reason as their banking cousins," he said. "FHA loans are riskier given the credit quality of the borrowers and the required underwriting, and they may not feel they can generate a return that compensates them for that risk."
Ashbaugh noted that FHA loans are also riskier than other mortgage products because FHA loans are marketed to folks with low FICO scores.
"These borrowers tend to go delinquent from time to time and have a higher chance of foreclosure and bankruptcies," he explained. "As a result, sound underwriting of these loans is critical to avoid defaults and challenges to the representations and warranties made to FHA. The FHA and CFPB review these loans from time to time to make sure the underwriting was sound and [they] have been known to penalize organizations for violations, large or small."
Still, Ashbaugh said banks' departure from this program could be a good opportunity for credit union, as long as CUs exercise caution. "These mortgages should be carefully underwritten, considering the pitfalls here are bigger than with other mortgages, including increased regulations," he stated. "But since credit unions are mandated to be 'member-focused,' they have an obligation to serve all of their members, particularly those with modest incomes and spotty credit histories."
Jon Paukovich, senior vice president and chief lending officer at $4.2 billion Ent Federal Credit Union in Colorado Springs, Colo., also thinks credit unions should try to grab a bigger slice of the FHA pie. "But it depends upon the individual credit union, their size and the scope of their operations," he said. "Dealing with FHA loans is very labor-intensive, with a need for specialists and an adherence to stringent regulations."