The Wall Street Journal-20080213-Credit Unions Offer Lifeline On Mortgages

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Credit Unions Offer Lifeline On Mortgages

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NEW YORK -- When it looked like Candido Rodrigues would lose his home, he was rescued by an unexpected source: a credit union.

Like many homeowners caught in the credit crunch, Mr. Rodrigues, a social worker, faced rising interest rates on his subprime mortgage. Eventually, he couldn't afford the $2,800 monthly payments, not even with a second job.

Banks weren't willing to refinance the mortgage. They gave him lots of excuses -- not enough equity, not enough salary.

He didn't expect a credit union would either -- he wasn't even a member -- but it refinanced his home on terms that allowed him to stay afloat.

Big banks still smarting from multibillion-dollar subprime losses have tightened lending standards and are lending almost exclusively to those with top credit scores. Many individuals who were eligible a year ago for a traditional mortgage can't get refinancing for their subprime loan.

Credit unions to the rescue. Unlike big lenders, credit unions didn't suffer heavy losses in recent months because they never made risky subprime loans.

Bill Hampel, chief economist at the Credit Union National Association, says that while some credit unions have experienced "collateral damage" from the subprime crisis, as members have lost jobs in depressed areas, most have strong balance sheets and near- record capital levels. As a result, they're "going to make any loan they possibly can make," he said.

Many credit unions continue to refinance subprime loans and offer banking products no longer available from other lenders, including five-year adjustable-rate mortgages.

Support from credit unions, and also from community banks, could be a critical prop for consumers and the economy. Mortgage companies are doing more to work with delinquent borrowers and avoid foreclosure, but a recent report released by the State Foreclosure Prevention Working Group, made up of state attorneys general and banking regulators, found those efforts aren't keeping up with the rise in delinquent loans.

The study found that a significant percentage of subprime borrowers struggle to pay their mortgages before they reset to higher rates, and that "the refinance option has nearly evaporated."

John Hall, a spokesman for the American Bankers Association, encouraged consumers trying to refinance subprime loans to contact community banks. While typically conservative, these institutions have plenty of cash to lend.

Credit unions often are even more flexible. They're chartered as not-for-profit, cooperative institutions owned by their members. They don't pay dividends to stockholders, and are supposed to meet the needs of members. Like other financial institutions, however, they're regulated, and deposits of up to $100,000 are insured.

To join a credit union, members must meet certain criteria, frequently related to where they live or work. Sometimes a person's connection to a credit union will allow relatives to join who might otherwise be ineligible.

Membership is widespread: 90 million Americans belong to a credit union.

"Credit unions," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America, "offer more personalized service" than banks, which "can make the difference between people getting approved and refinanced out of a loan."

Steve Renock, executive vice president of the Orange County Teachers Federal Credit Union in California, says credit unions are often more flexible in making loans because they make "story loans," he says. "We want to hear the story behind why they have had credit problems."

That flexibility makes it more likely for them to lend to someone who had a temporary financial setback because of, say, an illness or divorce.