Credit Unions: The Homeowner's Friend

Credit unions that bypassed the mortgage meltdown are increasing their loan production as other lenders falter.

When Christina Aguilera released a throwback album in 2006, she called it Back to Basics. Today, credit unions are quietly sending their own "back to basics" message to the many prospective borrowers who've been given icy treatments by banks during the credit freeze.

Mortgage lender landslide

As traditional bank lenders cut back on loan approvals, credit unions are poised to pick up the slack. According to the Mortgage Bankers Association, mortgage applications dropped during the week ending October 31 to their lowest point in almost eight years. The decline is related to the implosion of the U.S. housing market.

In hindsight, these lenders now realize that they'd let their underwriting standards fall too low during the housing boom. Now, they're backpedalling-to the point that they're hardly lending money to anyone anymore. The current saying goes that the only people who can get a loan now are those who don't need to borrow.

Credit union uprising

As banks and mortgage lenders pull back, credit unions are quietly ramping up their operations to pick up the slack. According to the research firm Callahan & Associates, credit unions increased their production of first mortgage loans by 40 percent in the first six months of 2008. During that same time period, industry-wide production fell by 17 percent.

Many credit unions make loans the old-fashioned way. Unlike mortgage lenders, they typically don't sell the loans they make; they hold them in their own portfolios. As such, they tend to be more careful about who they lend money to. They qualify buyers based on their ability to pay, and shy away from specialty loan structures that make expensive homes seem more affordable. The credit unions that stayed true to these time-tested practices are unaffected by the mortgage crisis. Now, they have more flexibility than other lenders because they aren't strapped down by bad loans and losses.

Personal risk assessment and no funny stuff

In general, credit unions are more likely to consider the prospective borrower as a person, rather than as a set of credit metrics. This is most advantageous to borrowers who've encountered credit problems related to a temporary financial setback. Where the borrower can prove the issue has been remedied, the credit union may be willing to take the risk-particularly if the borrower is already a long-time customer.

Credit unions do not, however, cut corners in their underwriting. Prospective borrowers will have to provide full documentation of their income and assets. There won't be any creative financing to beef up the approvable loan amount, and there'll be questions asked about prior credit problems.  Qualified borrowers are receiving a warmer reception from credit unions than they are from the banks, and possibly a cheaper rate, as well.

That's the message that credit unions are putting out in the marketplace. If you can afford the mortgage you want, check with your local credit union. Chances are, they'll be happy to see you.