Although the economy and housing markets show signs of slow improvement, many credit unions face a slew of requests from members to modify loans and consumer debt—particularly mortgages.
Many factors are contributing to this trend, including persistent unemployment, massive layoffs, and a slow housing market that makes it difficult for mortgage-holders to unload houses they can no longer afford. In some markets, real estate values have plummeted as much as 50% to 70%. Meanwhile, the national average unemployment rate hovers around 10%.
- The reasons for a formal loan modification policy and set of procedures, and who to consult in their formation;
- The difference between documented hardship and negative equity;
- Tools and options for loan modification;
- A brief overview of the Home Affordable Mortgage Program (HAMP);
- The basics of determining Troubled Debt Restructuring (TDR) loans;
- Analysis of loan modification applications and accompanying documentation;
- Factors associated with successful repayment of modified loans; and
- Tracking of loan modifications.
Two primary advantages of performing loan modifications, notes the white paper are:
- The ability to retain loans within the credit union’s portfolio; and
- The avoidance of foreclosure costs when loan modification proves to be less expensive.
“Loan modification is an option to assist the member through a period of temporary (or sometimes permanent) financial setback,” suggests the whitepaper. “It allows the credit union to retain the loan, and in the case of a home loan, avoid foreclosing on a possibly declining asset while also assuming expensive foreclosure costs.
“Ideally, the credit union wants the member to retain his or her house or car and will do whatever it can to assist the member to continue to make payments on the loan. This is particularly true for members who have a documented hardship such as loss of a job.”
A credit union’s margins, however, aren’t the same as those of most big banks, it notes. When members have lower interest rates, the credit union has less flexibility to dramatically alter the terms of the loan. Further, as a financial cooperative, it must protect the collective assets of its membership, abide by safe and sound lending practices, and adhere to the guidelines and requirements of the National Credit Union Administration (NCUA) and its examiners.
This often means the credit union must turn down members who can still afford their monthly payments even though their loans are for more than the current real estate value of the home.
Next: Loan modification options