Making More Informed Default Decisions
While unemployment rates and overall economic activity have continued to slowly improve, mortgage default rates have also started to slow. Nonetheless, mortgage defaults are still significantly higher than pre-crisis levels, and it is expected to take years for those levels to return to “normal.”
Even though most of the mortgage delinquency and default burden has fallen on the nation’s banks, credit unions have not been exempt. And since credit unions reached record-high mortgage lending levels in 2012, they’re likely to face a higher number of potential delinquencies and defaults simply based on volume, despite the fact that the percentage of delinquency and default levels will likely remain lower than those at banks.
Overall, credit unions are able to offset some of their risk by selling approximately 50 percent of their portfolios on the secondary market, primarily through Fannie Mae and Freddie Mac. But with the other half of the mortgages they originate remaining on their books, credit unions are also focused on stepping up loss mitigation efforts to better deliver on membership promises.
When it comes to managing mortgage portfolio risk, information is key. Credit unions are aware of the importance of knowing the estimated property value associated with a delinquent or defaulted mortgage loan. As a result, most request an Automated Valuation Model (AVM) report as soon as a loan becomes delinquent. However, some credit unions stop there, though there is much more they can do.
To make the most informed loss mitigation decisions, high-quality information is available and in high demand. Credit unions can benefit greatly by tapping available information about local market conditions in the areas where their collateral asset properties are located – even down to the ZIP code and neighborhood level. For example, in areas with a high percentage of foreclosures and REO properties, housing supply can far outpace demand, which in turn puts downward pressure on home prices.
Fortunately, credit unions can access an AVM that includes vital local market condition information in a single report to help improve the decision-making process. The market condition information combined with the AVM valuation not only lets credit unions know what the subject property is worth now, but it also projects what the subject property could be worth if it becomes an REO in the future.
The estimated REO property value is derived from a range of available data, including the average time it takes a property associated with a defaulted mortgage loan to become an REO property in a specified area. A discount rate factor is applied based on what is happening with REO pricing in that particular market. Both a historical and a forecasted value trend for 12 and 24 months are available.
The range of available market-specific condition information is impressive. Credit unions can access data that includes the number of area home sales; average number of days on the market; number of foreclosures; number of REO properties listed; number of short sales; property listing information; and a 5-year subject property transaction history. They can also obtain a subject LTV analysis and forecast of a property’s equity position, as well as details on recent area sales that include an indication as to whether or not the transaction was an REO sale.
Armed with this level of detail about a subject property and the related market conditions, credit unions can be better prepared to make decisions about how to best handle delinquencies and defaults. Whether considering a loan modification, short sale or other workout option, credit unions can have more confidence that they are making the best choice, staying consistent with regulatory guidelines and doing all they can to keep members in their homes while minimizing losses. Fortunately, credit unions don’t have to make these decisions often — but when they do, they want to be sure to make the right ones.
