Loan Modifications Pay Off

Credit Union Magazine
December 17, 2009 | COMMENTS

Loan modifications are an unfortunate reality of the Great Recession: The percentage of modified first mortgages grew from 0.53% at year-end 2008 to 0.92% as of March 2009, according to Credit Union National Association's (CUNA) economics and statistics department.

The same holds true during this timeframe for modified second mortgages (0.33% to 0.38%) and modified real estate loans reported as business loans (0.74% to 1.4%), CUNA reports.

Members' unique financial circumstances make it impossible to treat each loan modification the same, credit union lenders note.

Bill Vogeney details Ent Federal Credit Union's approach to loan modifications. He's a member of the CUNA Lending Council's executive committee and senior vice president/chief lending officer for the $2.6 billion asset credit union, based in Colorado Springs, Colo.

CU Mag: What factors do you consider when deciding whether to modify a loan?

Vogeney: A lot of things. We determine the member's situation and need. We try to verify as much information as possible, such as the member's income via paystubs or unemployment checks. We need to see just how dire the situation is.

Second, we consider whether it's likely to be a temporary or permanent problem. If it's temporary—the member has lost his or her job but will be able to find another job and have the income to support the debt—that's a big factor. We're more likely to come up with a creative solution if we see that.

On the flip side, if we don't think a member's situation will get significantly better, we may need to take other measures. If someone who works in residential construction lost his job, it's more than likely he won't find a job in this field within three to six months. Then it's difficult to do anything to significantly help them in terms of restructuring a loan.

Many people look for short-term solutions—they want to skip a payment or two to get caught up. But sometimes a modification won't help their situation, it will only postpone the inevitable. If we do something, we want to feel fairly confident the member will repay.

We also look at our collateral position and what the potential loss is: Are we keeping our situation the same, making it better, or potentially making it worse?

Let's say someone with significant financial problems comes to us and they have a home equity loan. Originally, the loan-to-value (LTV) was 90%, but now it's 105% due to current home values. The balance is $30,000 and we're behind a $200,000 first mortgage. We're not going to foreclose and pay $200,000 to buy out the interest on the first mortgage to pursue our $30,000 second mortgage. Our situation won't get any worse—if the member defaults and walks away, the home goes into foreclosure and it's a full loss.

If our situation can't get any worse, we'll do a more aggressive plan as compared to a situation where we have a good collateral position.

One recent example: We have a member who lost her job, has a small income, poor job prospects, and some health problems. She wants some assistance. We have a first mortgage for $80,000 and the house is worth $150,000.

We have a good collateral position, we don't think the member's financial situation will get much better, and the member has a lot of credit card and other debt getting in the way of making her mortgage payment.

Our recommendation was to sell the house and pay down her debt with the equity. At least she'll have a chunk of cash left over, and she'll be able to rent an apartment for less than a house payment. And she won't have the hassles of upkeep.

In some situations, you have to level with people and say, “Owning a home in your current situation isn't the best thing for you. You need to get out from under this.”

CU Mag: This sounds labor-intensive.

Vogeney: It absolutely is. We've added staff and brought in people from other credit union departments to handle requests for assistance. We don't need hard-core collectors; we need people who understand our members and know how to treat people with respect.

We have a couple of employees who look at more normal situations, where a person wants to skip a payment or two or wants to lower the interest rate on a car loan. Say a member has equity in the car but a high payment and 24 months left to pay. We may be able to refinance the loan over 48 months and lower the payment.

I personally look at every mortgage modification and every request that comes though the National Credit Union Administration's CU Harp program, and each of our aggressive modifications on home equity and auto loans. That takes a couple hours of work per week out of my schedule. But I feel strongly that these need a great deal of attention.

Among Ent members whose loans were temporarily modified, Vogeney reports that 70% have been able to return to their original payment levels.