Credit Unions Swim Against the Tide, Increase Mortgage Lending

At a time when most mortgage lenders are tightening up credit and cutting back on loans, at least one part of the industry is showing remarkable growth - credit unions.

According to a study by the industry publication Inside Mortgage Finance, credit unions nationwide increased the mortgage originations by 17 percent in 2008, compared to a decline of 39 percent for the industry as a whole. As a result, credit unions increased their share of total mortgage lending from 2.5 percent in 2007 to 4.7 percent in 2008.

Dodged the Subprime Meltdown

Those in the industry say there are a variety of reasons why credit unions are continuing to lend in the current economic climate. High on the list is that, as nonprofit organizations, they didn't get caught up in the subprime mortgages and other high-risk investments that burned much of the financial industry.

"They have money to loan while other lenders do not," said Dave Adams, CEO of the Michigan Credit Union League (MCUL).

Adams said credit unions nationally have about $160 billion in member deposits available to lend, with $9 billion available in Michigan alone. Typically one-third of credit union lending is for mortgages, he said.

Flexibility in local markets

Another reason is that credit unions often have more flexibility than large banks, and can identify creditworthy borrowers and situations that large banks might pass on.

"In many cases, CUs are local to the real estate market in which they lend, so they may have more local knowledge than a bank and may know the customer better," said Craig Focardi, Senior Research Director for Consumer Lending with the Tower Group.

"Larger banks today are applying a one-size-fits-all approach to underwriting borrowers in local real estate markets," he continued. "Raising credit requirements, tightening approval guidelines, cutting lending in specific markets and eliminating certain loan programs."

Focardi noted that credit unions have the opportunity to respond more directly to individual customers. He said that even if certain properties are deserving of credit, large banks may not be lending to them.

"That's a sweet spot credit unions can fill without raising their own lending risk," he said.

Three years of strong growth in lending

Nationally, credit unions have seen steadily increasing growth in the mortgage business the past three years. Credit union mortgages increased by 10.2 percent in 2006, 12.3 percent in 2007 and 14.8 percent in 2008, according to figures from the MCUL. It's too soon to predict what the figures will be for 2009, but with the current low interest rates and depressed housing prices, the demand will likely be there. "In terms of new financing, there's never been a better time to buy a house," said Adams.